Global Trade and Finance Flashcards
(44 cards)
two components of the global finance system
o International monetary system (regulates exchange rates (price of one currencies relative to another) b/w economies
o International investment system (regulates how capital flows across borders)
explain financialisation
progressive insertion of the logic of finance becoming more prevalent in our lives
define financial markets and its role
where people trade fungible items (usually more accurately ‘exchanges’)
- Role: link lenders and borrowers in allocating economic resources
- Developed to support the ‘real’ economy
explain real and money economy
o The ‘real’ economy: concerned with producing goods and services- e.g. manufacturing
o The ‘money’ economy: financial markets, concerned with buying and selling fungible items
what is an inherent part of financial markets and why
risk= expectations of future income flows uncertain
3 parts of mundell flaming
capital mobility
exchange rates
monetary policy
explain MF capital mobility
ability of money to cross borders freely
Allows access to greater funds for investment + growth
explain MF exchange rates
existence of fixed or minimally floating currencies
Reassures investors that value of their money not lost through depreciating currency + avoids uncertainty of fluctuating currencies
explain MF monetary policy/autonomy
able to set own interest rates in response to domestic conditions
Rates able to influence domestic growth and employment
what is mundell flame tricot know as
impossible trinity
why can’t gov peruse monetary policy if already strving for first two
o If gov pursue indep. Monetary policy, might then set domestic interest rates low to drive economic activity bc economy experiencing downturn (so lower interest rate to drive activity)
o Then capital leave country as interest rate low= less return in domestic market
o Capital leaving= produces downward pressure on exchange rate
o Gov could increase interest rates to maintain value of exchange rate but this means abandoning initial goal of lowering interest rates
which combination of MF does gold standard express
• Fixed exchange rates + capital mobility
which combination of MF does bretton woods express
• Fixed but adjustable exchange rates + independent monetary policy
which combination of MF does liberalisatoin express
• Sacrificed fixed exchange rates to prioritise capital mobility and preserve autonomy over monetary policy
benefit of gold standard
Reduced foreign exchange risks (provided certainty + // increased international trade) and the incentive for speculation
cost of gold standard
constrained government policy (less control over domestic policy) + long-term stability came alongside short-term fluctuations generated by periodic surges in the world’s gold stock
benefit of bretton woods (embedded lib)
Government spending used to shape aggregate demand (a ’demand-side’ theory to managing the business cycle
• Enabled open economy but governments remained able to target domestic objectives i.e. unemployment)
• Through keyenism policy (spend more to stimulate economy + reduce unemployment) - I.e. infrastructure projects
• Fundamental disequilibrium- countries given option to change peg value of currency if under pressure - sustained payment deficient (more money leaving than coming in) (IMF)
• // could control capital movement (control private financial flows that had potential to disrupt exchange rates and gov autonomy in economic policy) = Mundell Policy
cost of bretton woods
unhelpful in tackling stagflation alongside broader structural issues (Triffin Dilemma)
why nixon shock occured (bretton woods end)
- Ending gold standard= Nixon to intervene in economic downturn + tackle unemployment more effectively
- Structural pressures on US dollar
- Fixed exchange rates undermined by Triffin Dilemma: balance b/w dollars and gold deterior, more dollars outside US than inside + gov not able to redeem dollars for gold
- // Floating exchange rates
benefit of liberalisation
Monetarism (in response to stagflation- targeting high inflation over unemployment), with governments controlling amount of money in circulation – a ‘supply-side’ theory to managing the business cycle – tackled structural issues
cost of liberalisation
created conditions for increased speculation (transactions taking place for profit on expectation of movement in the values of currency rather than to finance international trade and investment)
why was staglflation occurring
o Price shocks were slowing economy – spike in price of oil
Also meant production less profitable = combination of high unemployment + high inflation
o Keyenism at odds of these events
IMF role
- No longer monitoring activity but a lender of last resort
o Large short term loans in times of economic crisis to stabilise + manage debts
what is FDI
investment in ownership and management of assets in another country
