Week 2 Flashcards
(23 cards)
What is monetary policy
About determining money supply
Usually done by the Central bank
Controlling inflation vs promoting economic growth
Why cooperate?
- Stabilize exchange rates to reduce transaction costs for trade and investment.
- Create lending mechanisms for countries in balance of payments difficulties, in
particular with foreign exchange shortage.
Why cooperate through institutions?
- Weaker currency makes export more competitive
- Crisis lending mechanism leads to moral hazard
To ensure commitment from all participating states there is a need to:
- Create shared rules mechanisms for monitoring, information, possibly enforcement
- Create perspective of continuing cooperation, enhance predictability, and build trust
- Correct for individual incentives NOT to cooperate and ensure collective gain
How to cooperate on monetary affairs?
- Minimal approach: coordinate monetary policy and stabilize flexible exchange rates
- Fixed exchange rates
- Monetary union
- Arrangements that can provide support in case of balance of payments crisis
Monetary union
- Irrevocably fixed exchange rates, no adjustments possible
- May lead to single currency
Fixed exchange rates
- Central bank guarantees specific exchange rates
- May allow a degree of flexibility
- Reduces transaction costs but ties down monetary policy
Role of IMF (before)
- Monitoring and advice for implementing fixed exchange rates systems
- Provide loans to countries with balance of payments difficulties (lender of last resort)
Role of IMF (after)
- Continues to monitor macroeconomic policies (“surveillance”) and to provide related advice;
now in combination with technical assistance (“capacity development” - Remains lender of last resort
- Context of debt crises of the 1980s: IMF becomes de facto coordinator of debt restructuring
Development under the non-system
- Regular sequences of major crisis
- Tendency of growing loan volume
- Need access to more and more resources
Governance structure
- Board of governors and directors
- Governments decide via weighted voting - voting share depends on capital contribution
2010 reforms IMF
Total quotas doubled, increased weight for developing countries and emerging economies
Werner report 1970
Unification of monetary and economic policy by 1980 of the EU
Three basic elements European monetary system
- Exchange rate mechanism (fixed but adjustable)
- Facilities for mutual credit facilities for defense or fixed exchange rates
- European currency unit
How can the development of the EMU be explained
- Focus on states (intergovernmentalist perspective)
- Focus on supranational dynamics (neo-functionalist perspective)
Intergovernmentalist perspective
Member states preference for fixed exchange rates
Neo-functionalist perspective
- Central role for the European Commission as an agenda setter
- EMU as spill over from common market
European Central Bank branches
- Executive board
- Governing council
- General council
Purpose and role ECB
Inflation goal of less than but close to 2%
ESCB
Includes central banks from non eurozone EU members for coordination
Failing forward
- Incomplete, unsustainable solutions ->
- Necessarily lead to new crises ->
- Leading to cycles of insufficient patch-ups and crises ->
= And yet integration is deepening over time
There are numerous types of IMF lending and on-lending arrangements:
(1) Concessional Arrangements: Very low or even zero interest rates.
(2) Non-Concessional Arrangements: Market-based interest rate.
The IMF’s functions expanded so that they include three main areas:
- Surveillance
- Capacity development
- Financial support
