Week 8 Flashcards
(38 cards)
What are the 3 tasks of the monetary system ?
Monetary systems look to fulfill three tasks:
- Liquidity: a monetary system needs to provide enough liquidity funds to finance trade and investment, and to serve as a lender of last resort in times of crisis.
- Confidence: monetary systems need to provide low uncertainty about future stability in order to make it Investment-attractive, and therefore need to have limited volatility.
- Adjustment: monetary systems need to push for adjustments in order to reduce imbalances destabilizing the system.
What are the 2 different adjustment mechanism ?
- In the case of fixed exchange rates, recession hits, and decreases wages affecting workers most. Central banks don’t interfere in this process, they can only speed it up.
- Here there is no recession. Foreign producers (and capital owners) are the ones bearing the costs of the adjustment.
When there are flexible exchange rates, what are the effects of the increasing current amount deficit on:
- the money outflow
- exchange rate
- domestic and foreign prices
- exports and imports
- current acount deficit
- the money outflow increases
- exchange rate decreases
- domestic and foreign prices decrease
- exports increase
- imports decrease
- current acount deficit decreases
When there are fixed exchange rates, what are the effects of the increasing current amount deficit on:
- the money outflow
- money supply
- domestic prices
- exports and imports
- current acount deficit
- the money outflow increases
- money supply decreases
- domestic prices decrease
- exports increase
- imports decrease
- current acount deficit decreases
What are the key monetary systems ?
pre-1914 period = Gold standard
interwar period = return to gold and collapse
post-1945 period = Bretton woods and collapse
post-1973 period = hybrid (non-)system
Why did England move to the Gold standard ?
When Britain moved to the Gold standard, it led to the diffusion of it. The Gold Standard relied on a fixed exchange rate system, a priority for external stability, and capital mobility.
Explain the stability of the Gold standard
When Britain moved to the Gold standard, it led to the diffusion of it. The Gold Standard relied on a fixed exchange rate system, a priority for external stability, and capital mobility.
As external stability was considered crucial, adjustments had to be made on the internal level via compression of domestic demand. This is illustrated by David Hume’s Price-Specie-Flow model.
Explain the theory of the Great Transformation by Polanyi
Polanyi describes the slow death of the Gold Standard, the international disintegration of that system as a consequence of Britain’s declining power, and the raising costs it had to pay in order to defend the Gold Standard.
Domestic pressure increased, and there was unwillingness of policymakers to subordinate questions of social organization to the restoration of currency. The reasons for that are rising labor interests, and shifts in economic beliefs and values.
In her analysis, the Dependent Variable is the Stability of the monetary system, and the Independent variable either confidence, or hegemony. Other explanations include new governments, namely social democratic ones, democratization, or domestic/international changes.
The underlying question when developing a monetary system is who will bear the costs of adjustments? What are the different adjustment interests ?
- Asset owners: Asset owners become their income from investment returns, therefore, their interest relies in a stable, low inflation system.
- Working class: The working class receives its income from employment; the demand for countercyclical fiscal and monetary policies leads them to prefer a flexible monetary system.
Why did the working class demand became stronger after 1918 in England ?
Institutional changes in England after 1918 explain why this demand became stronger. There was universal male suffrage, and empowerment of parliaments. This meant a strong political resistance to internal adjustments during the interwar period.
Consequently we observe an empowerment of parliaments ant theincrease of the labor power. Thus they want a flexible XR.
Explain the theory of keynesianism
Keynes observed in the interwar period persistent unemployment, and strong commercial competition (tariffs etc.). He interpreted it as a failure of internal adjustments, and the use of commercial policy as a way to bypass these adjustments.
Keynes pleaded for the priority of internal stability. His view was widely unpopular, as it was inconsistent with the Gold Standard. It is only when the Gold Standard collapsed that that Keynes served as a framework to make sense of the new situation.
Explain the theory of policy learning by Morrison
A study by Morrison describes the departure of Great Britain from the Gold Standard more like an accident than a choice. Before Britain exited the Gold Standard, even the Labor party was against a departure from it, even though it contradicts the interests of the workers the party represents.
If we apply the theory of policy learning by Morrison to Britain’s adandonment what are we observing ?
The debate was at its highest in August 1931, and opposed the Governor Normans who wanted to increase external stability, and Deputy Governor Harvey, who was for a departure of the Gold Standard.
In September 1931, Harvey temporarily suspended Gold convertibility as a sort of experiment. What came out of this is that there was a 30% depreciation, no hyperinflation, and a growing economy.
What started as an experiment ended up being a comfortable situation for Britain, leading to its choice not to go back.
What is Bretton woods ?
The Bretton Woods conference in 1944 opposed White to Keynes who had different ideas about the shape the new monetary system should have. In the end, the Bretton Wood resulted in a monetary system with a fixed but adjustable exchange rate, a gold-dollar standard, capital controls, but what changed a lot from the previous system was that it allowed for domestic autonomy. The IMF was also an introduction of the Bretton Woods system.
How are the adjustement under the BW system ?
Under this regime, adjustments would be symmetric (between deficit and surplus countries). External adjustment should happen only in the case of a “fundamental disequilibrium”.
How was the BW system in Europe at the beginning ?
In its early years, the geopolitical situation in Europe led to the Bretton Wood System to be fragile. European currencies were unstable, but through the Marshall plan, the system eventually stabilized by the late 50s.
When did the destabilization of the BW system occur ?
Destabilization occurred with the US trade deficit. This would lead to the “Dollar glut”, an overflow of dollars in the world resulting from the creation of new money from the US to counter the trade deficit. This was seen as an exorbitant privilege for the US, and raised conflicts.
When the Gold Window was closed in 1971, it led to the collapse of the Bretton Wood system. In 1973, fixed exchange rates were abolished.
Explain the theory of the embedded liberalism
The embedded liberalism is a compromise between 2 positions defended by the US and the UK: liberal democracy and economic regulations. Within this theory the governement should protect its citizens from economic recession (fixed XR) by interviening within the capitalist economy to provide full employment, social safety nets and economic growth.
What are the 4 norms of the BW system ?
- trade promotion, domestic autonomy
- public international finance
- symmetric adjustement
- monetary stability
What are the 5 rules of the BW system ?
- fixed, but adjustable exchange rate
- adjustment if fundamental disequilibrium
- capital controls
- emergency lending
- surveillance
How it the IMF fund today ?
The key developments that led to the transformation of the IMF are first the breakdown of the Bretton Woods system (1973). The rise of the G7 at that same time as a parallel institution and recurrent financial crises led to it changing its functions.
The fund was “revived” by taking the role of sovereign debt managers, capital account crisis managers, by pushing economic transitions and reforms, and a new element changing its nature is also conditionality.
How was the Gold supply within the BW system ?
Gold Supply in the Bretton Woods system considerably shrunk over time. This was caused by the US expansionary policy, their current account. As the amount of dollars on the market increased, gold could not follow the growth of dollars. What other countries had to do to keep the system stable was buying more and more dollars as a reserve. At the time of the end of the Bretton Woods system, foreign countries held about 14 billion in US dollars, while the US had 13.8 billion dollars-worth of gold.
What is the problem with he Gold supply within the BW system ?
The problem here is that confidence decreases, because everyone expected a reevaluation of the value of Gold.
Explain the Triffin dilemma
The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. Triffin pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.
