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Int Finance > IMS and financial crises > Flashcards

IMS and financial crises Flashcards

1
Q

Exchange rate regimes and how they worked

A
  • classical gold standard: transfers of gold could be substituted by transfers of currencies
  • gold exchange standard: US and UK could only have gold reserves while others had gold and USD or Pounds
  • bretton wood: currencies pegged to USD or gold
  • Post bretton: floating regime
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2
Q

Why bretton woods failed?

A
  • undervalued DEM and JPY
    -Fear USD would devalue
  • DEM lowered its value by selling DEM to buy USD
  • money supply germany increased
    -couldn’t sterilized and maintain the fixed exchange rate
    -20% increase in money supply germany
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3
Q

countries with exchange rate targeting

A

argentina panama

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4
Q

countires with monetary targeting

A

germany, switzerland

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5
Q

countries with inflation targeting

A

australi, canada, UK

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6
Q

Countries with mon. policy with implicit nominal anchor

A

USA

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7
Q

Adv and disadv of monetary targeting

A
  • allosw CB to adjust monetary policy quickly in response to domestic needs
  • info on achieving goals is known almost immediately
    but:
  • there must be a clear relation between monetary aggregate and more visible goal variable
  • central bank must efficiently control the targeted monetary aggregate
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8
Q

Adv disadv of inflation targeting

A

adv:
- monetary policy focused on domestic needs
- easily understood
- increases CB’s accountability
DIsadv:
- may lead to unstable output growth and unemployment
- May put stringent bounds on policy makers to respond to unforeseen economic circumstances

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9
Q

Adv disadv implicit targeting

A

adv:
- demonstrated success on the us econ prior to 2008
- forward-looking
Disadv:
- lack of transparency
- strong dependence on personal skills and preferences

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10
Q

Adv disadv of Quantitative Easing

A

adv: can be implemented without printing new money and when interest rates are close to zero
Disadv: can lead to inflation due to oversupply of money and misuse of additional funds

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11
Q

Possibilities of fixed exchange rate regimes

A
  • fixing value to a commodity
  • fixing value to that of a large, low inflation country
  • adopting a pegging target in which the home currency is allowed to depreciate at a steady rate
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12
Q

Two possible regimes of floating currency

A

-managed float
- independent float

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13
Q

Adv of fixed rate targeting

A
  • fixes inflation for int traded goods, keeps inflation under control
  • inflation expectations in home country tied to that of target country
  • forces to have tight monetary and fiscal policy
  • simplicity and clarity of the policy
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14
Q

Disadv of fx rate targeting

A
  • leads to loss of independent monetary policy
  • directly transmits traget country’s shocks
  • leaves country open to speculative attack on its currency
  • increases possibility of financial crises in dev countries
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15
Q

Adv disadv of floating rate regime

A

adv:
- offset cross country diff in inflation
- can stabilize nominal exchange rates if countries pursue coordinated monetary policy
Disadv:
- potentially lead to high real exchange rate volatility
- increases uncertainty about future govt policy

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16
Q

Structure and purpose of eurodollars

A

-time deposits, not demand deposits
purpose:
- way of holding excess corporate liquidity
- major source of short-term bank loans

17
Q

Major trends

A
  • increased collaboration among govts on fiscal and monetary policies
  • increased understanding of a need for a new system of fixed exchange rates
18
Q

Major pitfall

A
  • protectionnism
  • instability of developping and some developed countries
19
Q

FInancial crises can occur as a result of (rank them in order of how serious they are)

A
  • Currency crisis
  • banking crisis
  • twin crisis (both together)
20
Q

Theory of depletion of international reserves

A

unsustainable monetary-financed fiscal deficits lead to a persistent loss of international reserves and ultimately ignite a currency crisis

21
Q

Theory of governments commitment to 2 conflicting targets

A

Govt can have conflicting goals: ex decrease unemployment govt may want to devalue currency to increase comp abroad, and abandon the peg (like germany in bretton woods)

22
Q

Theory of sudden reversals in capital flows

A
  • cap inflows can come to a stop and suddenly become outflows
  • liberalization of cap markets may contribute to unrestricted movement of short term cap
  • long term cap inflow would contribute to more foreign investment
23
Q

Teory of substantial increase in credit

A
  • excess credit can fuel a prolonged expansion of economic activity
  • as recession unfolds, depositors reassess the risks and withdraw large amounts of money from banks
  • the banks position can be weakened if there is increase in deposit rates abroad
24
Q

Asymetric info theory

A
  • hard to channel funds to best investment with moral hazard in play
25
Q

How to resolve the crises

A
  • FS must be restarted as soon as possible
  • BS of firms must be restored to lessen the asymmetric info prob
  • moral hazard from intervention must be limited
26
Q

lessons from crises

A
  • strong rationale for international lender of last resort
  • this lender should impose appropriate conditions on its lending
  • exchange controls cannot advert the crises
27
Q

Why a lender of last resort

A

because industrialized countries have ability to recover from crises without sparking inflation while emerging countries do not

28
Q

lending condition

A
  • insolvent financial inst must be closed down
  • depositors must be convinced that their funds are not at risk
  • lending must be provided fast if those cond are met
29
Q

Capital movements can have an important role in producing financial instability, BUT

A
  • only the result of inadequte monitoring of banks by the govt
  • lack of supervision can encourage excessive capital inflows and risk taking
30
Q

dangers of pegged exchange rates

A
  • devaluation is larger from a speculative attack
  • can facilitate excess outflow and inflow

Int Finance (10 decks)

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