EconomicPolicy(宏观经济学-加州大学-詹姆斯·布拉sbk.pptx

CHAPTER 15International Economic Policy1Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.QuestionsHow has the world organized its international monetary system?What is a fixed exchange rate system?What is a floating exchange rate system?What are the costs and benefits of fixed exchange rates vis-vis floating exchange rates?2Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.QuestionsWhy do most countries today have floating exchange rates?Why has western Europe recently created a“monetary union”-an irrevocable commitment to fixed exchange rates within western Europe?What were the causes of the three major currency crises of the 1990s?3Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Gold StandardBefore World War I,nearly all of the world economy was on the gold standarda government would define a unit of its currency as worth a particular amount of goldthe currency was convertiblecould be converted into gold freelythe currencys price in terms of gold was its parity4Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.2-Growth of the Gold Standard5Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Gold StandardWhen two countries were on the gold standard,their nominal exchange rate was fixed at the ratio of their gold paritiesat World War II paritiesthe U.S.dollar was equal to 1/35 of an ounce of goldthe British pound sterling was set to equal 1/15.58333 ounces of goldthe exchange rate of the dollar for the pound was 1.00=$2.406Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Gold StandardExample of currency arbitragethe U.S.government is willing to buy gold at$35 per ouncethe British government is willing to buy gold at 15.58333 per ouncethe pound trades for$2.64(10%higher than the ratio of the gold parities-$2.40)7Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Gold StandardSomeone with an ounce of gold couldtrade it to the British Treasury for 15.58333 trade those pounds for dollars in the foreign exchange market and get$38.50trade the$38.50 to the U.S.Treasury for 1.1 ounces of goldrepeat the process as quickly as possible,making a 10%profit each time the circle is completed8Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.1-How to Profit in the Foreign-Exchange Market9Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Weaknesses of theGold StandardThe gold standard tended to be deflationaryunder some circumstances,it pushed countries to raise their interest rates which reduced output and increased unemploymentit never provided a countervailing push to other countries to lower their interest rates10Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Weaknesses of theGold StandardIf the exchange rate is floating,foreigners domestic currency earnings must be used to buy exports or to invest in the home countryThe exchange rate moves up or down in response to the supply and demand for foreign exchange in order to make it so11Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Weaknesses of theGold StandardUnder a gold standard,foreign-currency earnings can also be used to purchase gold from the foreign countrys TreasuryIf a countrys net exports plus net foreign investment are less than zero,its Treasury will find itself losing goldthe countrys gold reserves shrink12Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Weaknesses of theGold StandardIf a countrys gold reserves are shrinking,it has a choiceabandon the fixed exchange rate systemmake it more attractive for foreigners to invest by raising domestic interest ratesputs contractionary pressure on the economyCountries gaining gold face no incentive to lower interest rates in order to stay on the gold standard13Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Collapse of the Gold StandardThe gold standard was suspended during World War IAfter the war ended,politicians and central bankers sought to restore itthey believed it was an important step in restoring prosperityAfter the Great Depression began,the gold standard broke apart14Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Collapse of the Gold StandardFour factors made the gold standard a less secure monetary systemeveryone knew that governments could abandon their gold parities in an emergencyeveryone knew that governments were trying to keep interest rates low enough to produce full employment15Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Collapse of the Gold StandardFour factors made the gold standard a less secure monetary systemafter World War I,countries held their reserves in foreign currencies rather than goldthe post-war surplus economies did not lower interest rates as gold flowed in16Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Collapse of the Gold StandardAs soon as a recession hit,governments found themselves under pressure to raise interest rates and lower outputcould either stay on the gold standard and face a deep depression or abandon the gold standardthe further countries moved away from their gold-standard rates,the faster they recovered from the Great Depression17Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.3-Economic Performance and Degree of Exchange Rate Depreciation During the Great Depression18Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Bretton Woods SystemThe Bretton Woods System was the result of an international monetary conference that took place in 1944Three principles guided this systemin ordinary times,exchange rates should be fixedin extraordinary times,exchange rates should be changedan institution was needed to watch over the international financial systemthe International Monetary Fund(IMF)19Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Bretton Woods SystemThe Bretton Woods System broke down in the early 1970sthe U.S.found itself with a large trade deficit and sought to devalue its currencySince then,the exchange rates of the major industrial powers have been floating exchange ratesfluctuate according to supply and demand20Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksA fixed exchange rate is a commitment by a country to buy and sell its currency at fixed,unchanging prices(in terms of other currencies)the central bank or Treasury must maintain foreign exchange reservesthese reserves are limited21Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksIf there is a high degree of capital mobility,the real exchange rate is set byThe higher the interest rate differential in favor of the home country,the lower is the exchange rate22Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.4-The Real Exchange Rate,Long-Run Expectations,andInterest Rate Differentials23Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksIf capital is highly mobile and the fixed exchange rate(*)is lower than foreign exchange speculators will want to sell the home currency for foreign currencythe government spends down its reservesto keep the exchange rate at*,the central bank must lower interest ratesmonetary policy no longer can play a role in domestic stabilization24Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.5-Domestic Interest Rates Are Set by Foreign-Exchange Speculatorsand the Exchange Rate Target25Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksThe central bank must set the domestic real interest rate equal toan increase in foreign interest rates(rf)requires a point-for-point increase in domestic interest ratesan increase in foreign exchange speculators views of the long-run value of the exchange rate(0)requires an increase in domestic interest rates26Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.6-Effect of Foreign Shocks under Fixed Exchange Rates27Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksIf capital mobility is lowthe exchange rate is also affected by the speed at which the government is accumulating or spending its foreign exchange reserves(R)when the government is accumulating reserves,the value of foreign currency is higher than it would otherwise beit is increasing foreign currency demand28Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.7-With Limited Capital Mobility a Central Bank Can Shift theExchange Rate by Spending Reserves29Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.How a Fixed Exchange Rate System WorksIf capital mobility is lowthe central bank can use monetary policy for domestic disturbancesthis is limited by the sensitivity of exchange rates to the magnitude of foreign-exchange market interventions performed by the central bank and by the amount of reservesthe domestic real interest rate will be30Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Benefits of Fixed Exchange RatesFloating exchange rate systems add riskdiscourages international trademakes the international division of labor less sophisticatedThis is an important reason behind the decision of most of western Europe to form a monetary unionfix their exchange rates against each other irrevocably31Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Costs of Fixed Exchange RatesUnder fixed exchange rates,monetary policy is tightly constrained by the requirement of maintaining the exchange rate at its fixed parityFixed exchange rates also have the disadvantage of rapidly transmitting monetary of confidence shocksinterest rates move in tandem all across the world in responseFixed exchange rates also make large-scale currency crises more likely32Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Fixed or Floating Exchange Rates?Is it more important to preserve the ability to use monetary policy to stabilize the domestic economy rather than dedicating monetary policy to a constant exchange rate?Is it more important to preserve the constancy of international prices and thus expand the volume of trade and the scope for the international division of labor?33Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Fixed or Floating Exchange Rates?Economist Robert Mundell argued that the major reason to have floating exchange rates is that they allow adjustment to shocks that affect two countries differentlythis benefit would be worth little if two countries suffered the same shocks and reacted to them in the same waythis benefit would also be worth little if factors of production are highly mobile34Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The European Currency Crisis of 1992After reunification with East Germany,the West German government undertook a program of massive public investmentthis shifted the IS curve outthe German central bank raised interest rates to keep inflation under control35Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.8-German Fiscal Policy and Monetary Response in the Early 1990s36Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The European Currency Crisis of 1992The increase in interest rates generated a rise in the German exchange rate vis-vis the dollar and the yenexports fellOther countries in western Europe had fixed their exchange rates to the German mark as part of the European Exchange Rate Mechanism37Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The European Currency Crisis of 1992The rise in German interest rates meant that these western European countries were required to raise interest rates as wellthe required interest rate increase threatened to send the other European countries into a recession38Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.Figure 15.9-Effect of German Policy on Other European Countries39Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The European Currency Crisis of 1992Foreign exchange speculators did not believe that these western European governments would keep this promise to maintain the fixed exchange rate parity when unemployment began to rise0 rose which caused an additional rise in the domestic real interest rate required to maintain exchange rate parity40Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The European Currency Crisis of 1992Different governments in western Europe undertook different strategiessome spent reserves in the hope that it demonstrated their commitment to maintaining the exchange rate paritysome tried to demonstrate that they would defend the parity no matter how high the interest rate needed to besome abandoned the fixed exchange rate and let their currencies floatThe end result was the formation of the European Monetary Union41Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Mexican Currency Crisis of 1994-1995The Mexican currency crisis was a surprise to most economic analyststhe governments budget was balancedthe governments willingness to raise interest rates was not in questionthe Mexican peso was not overvaluedThe peso lost half of its value in four months starting in December of 199442Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Mexican Currency Crisis of 1994-1995Concerns about political stability reduced foreign exchange speculators estimates of the long-run value of the peso and raised their assessment of 0the Mexican government spent$50 billion in foreign reserves and eventually ran outit devalued the peso and let it float against the U.S.dollarthe rise in caused a further increase in 0the value of the Mexican governments debt also increased,which led to further increases in 043Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Mexican Currency Crisis of 1994-1995The Mexican government had two optionsit could raise interest ratesthe level of interest rates required would produce a Great Depression in Mexicoit could keep interest rates low and let the value of foreign currency rise much furtherMexican companies and the Mexican government would be unable to pay their dollar-denominated debtsMexicos foreign trade would fall drastically44Copyright 2002 by The McGraw-Hill Companies,Inc.All rights reserved.The Mexican Currency Crisis of 1994-1995The U.S.made direct loans to Mexicothese loans built Mexicos foreign-exchange reserves back to a comfortable levelthis allowed domestic interest rates to remain relatively lowthe Mexican government was also able to refinance its debtconfidence was restored that the Mexic