跨国金融原理(第三版)教师手册M03_MOFF9242_03_IM_C.pdf

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1、Chapter 3 The International Monetary System 1.The Gold Standard and the Money Supply.Under the gold standard,all national governments promised to follow the“rules of the game.”This meant defending a fixed exchange rate.What did this promise imply about a countrys money supply?A countrys money supply

2、 was limited to the amount of gold held by its central bank or treasury.For example,if a country had 1,000,000 ounces of gold and its fixed rate of exchange was 100 local currency units per ounce of gold,that country could have 100,000,000 local currency units outstanding.Any change in its holdings

3、of gold needed to be matched by a change in the number of local currency units outstanding.2.Causes of Devaluation.If a country follows a fixed exchange rate regime,what macroeconomic variables could cause the fixed exchange rate to be devalued?The following macroeconomic variables could cause the f

4、ixed exchange rate to be devalued:An interest rate that is too low compared to other competing currencies.A continuing balance of payments deficit.An inflation rate consistently higher than in other countries.3.Fixed versus Flexible Exchange Rates.What are the advantages and disadvantages of fixed e

5、xchange rates?Fixed rates provide stability in international prices for the conduct of trade.Stable prices aid in the growth of international trade and lessen risks for all businesses.Fixed exchange rates are inherently anti-inflationary,requiring the country to follow restrictive monetary and fisca

6、l policies.This restrictiveness,however,can often be a burden to a country wishing to pursue policies that alleviate continuing internal economic problems,such as high unemployment or slow economic growth.Fixed exchange rate regimes necessitate that central banks maintain large quantities of interna

7、tional reserves(hard currencies and gold)for use in the occasional defense of the fixed rate.As international currency markets have grown rapidly in size and volume,increasing reserve holdings has become a significant burden to many nations.Fixed rates,once in place,may be maintained at rates that a

8、re inconsistent with economic fundamentals.As the structure of a nations economy changes,and as its trade relationships and balances evolve,the exchange rate itself should change.Flexible exchange rates allow this to happen gradually and efficiently,but fixed rates must be changed administrativelyus

9、ually too late,too highly publicized,and at too large a one-time cost to the nations economic health.Chapter 3 The International Monetary System 13 4.The Impossible Trinity.Explain what is meant by concept of the“impossible trinity”and why it is accurate.Countries with floating rate regimes can main

10、tain monetary independence and financial integration but must sacrifice exchange rate stability.Countries with tight control over capital inflows and outflows can retain their monetary independence and stable exchange rate,but surrender being integrated with the worlds capital markets.Countries that

11、 maintain exchange rate stability by having fixed rates give up the ability to have an independent monetary policy.5.Currency Board or Dollarization.Fixed exchange rate regimes are sometimes implemented through a currency board(Hong Kong)or dollarization(Ecuador).What is the difference between the t

12、wo approaches?In a currency board arrangement,the country issues its own currency but that currency is backed 100%by foreign exchange holdings of a hard foreign currencyusually the U.S.dollar.In dollarization,the country abolishes its own currency and uses a foreign currency,such as the U.S.dollar,f

13、or all domestic transactions.6.Emerging Market Exchange Rate Regimes.High capital mobility is forcing emerging-market nations to choose between free-floating regimes and currency board or dollarization regimes.What are the main outcomes of each of these regimes from the perspective of emerging marke

14、t nations?There is no doubt that for many emerging markets,a currency board,dollarization,and freely-floating exchange rate regimes are all extremes.In fact,many experts feel that the global financial marketplace will drive more and more emerging market nations towards one of these extremes.As illus

15、trated by Exhibit 3.6(in the chapter and reproduced here),there is a distinct lack of“middle ground”left between rigidly fixed and freely floating.In anecdotal support of this argument,a poll of the general population in Mexico in 1999 indicated that 9 out of 10 people would prefer dollarization ove

16、r a floating-rate peso.Clearly,there are many in the emerging markets of the world who have little faith in their leadership and institutions to implement an effective exchange rate policy.14 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 7.Argentine Currency Board.How

17、 did the Argentine currency board function from 1991 to January 2002 and why did it collapse?Argentinas currency board exchange regime of fixing the value of its peso on a one-to-one basis with the U.S.dollar ended for several reasons:a.As the U.S.dollar strengthened against other major world curren

18、cies,including the euro,during the 1990s,Argentine export prices rose vis-vis the currencies of its major trading partners.b.This problem was aggravated by the devaluation of the Brazilian real in the late 1990s.c.These two problems,in turn,led to continued trade deficits and a loss of foreign excha

19、nge reserves by the Argentine central bank.This problem,in turn,led Argentine residents to flee from the peso and into the dollar,further worsening Argentinas ability to maintain its one-to-one peg.8.The Euro.On January 4,1999,11 member states of the European Union initiated the European Monetary Un

20、ion(EMU)and established a single currency,the euro,which replaced the individual currencies of participating member states.Describe three of the main ways that the euro affects the members of the EMU.The euro affects markets in three ways:(1)countries within the euro zone enjoy cheaper transaction c

21、osts;(2)currency risks and costs related to exchange rate uncertainty are reduced;and(3)all consumers and businesses both inside and outside the euro zone enjoy price transparency and increased price-based competition.9.Mavericks.The United Kingdom,Denmark,and Sweden have chosen not to adopt the eur

22、o but rather to maintain their individual currencies.What are the motivations of each of these three countries that are also members of the European Union(EU)?The United Kingdom chose not to adopt the euro because of the extensive use of the U.K.pound in international trade and financial transaction

23、s.London is still the worlds most important financial center.The British are also very proud of their long tradition in financial matters when“Britannia ruled the waves.”They are afraid that monetary and financial matters may eventually migrate to Frankfurt where the European Central Bank is located

24、.The British are also worried about continued concentration of decision making in Brussels where the main European Union institutions are located.Denmark is also worried about losing its economic independence as a small country surrounded by big neighbors.Denmarks currency,the krone,is mostly tied t

25、o the euro anyway,so it does not suffer a misalignment with the primary currency unit of the surrounding economies.Sweden has strong economic ties to Denmark,Norway,and the United Kingdom,none of which adopted the euro so far.Sweden,like the others,are afraid of over concentration of power within Eu

26、ropean Union institutions.Despite popular fears and a certain amount of nationalism,all three countries have strong fores within that would like these countries to adopt the euro.This would usually require popular referendums,so you may see them adopt the euro in the future.Chapter 3 The Internation

27、al Monetary System 15 10.International Monetary Fund(IMF).The IMF was established by the Bretton Woods Agreement(1944).What were its original objectives?The IMF was established to render temporary assistance to member countries trying to defend the value of their currencies against cyclical,seasonal

28、,or random occurrences.Additionally,it was to assist countries having structural trade problems.More recently it has attempted to help countries,such as Russia,Brazil,Argentina,and Indonesia to resolve financial crises.11.Special Drawing Rights.What are special drawing rights?The Special Drawing Rig

29、ht(SDR)is an international reserve asset created by the IMF to supplement existing foreign exchange reserves.It serves as a unit of account for the IMF and other international and regional organizations,and is also the base against which some countries peg the exchange rate for their currencies.Defi

30、ned initially in terms of a fixed quantity of gold,the SDR has been redefined several times.It is currently the weighted value of currencies of the five IMF members having the largest exports of goods and services.Individual countries hold SDRs in the form of deposits in the IMF.These holdings are p

31、art of each countrys international monetary reserves,along with official holdings of gold,foreign exchange,and its reserve position at the IMF.Members may settle transactions among themselves by transferring SDRs.12.Exchange Rate Regime Classifications.The IMF classifies all exchange rate regimes in

32、to eight specific categories that are summarized in this chapter.Under which exchange rate regime would you classify each of the following countries?a.France:Exchange arrangements with no separate legal tender.b.The United States:independent floating.c.Japan:independent floating.d.Thailand:managed f

33、loating with no preannounced path for the exchange rate.Prior to the Asian Crisis of 1997 it was tied to the U.S.dollar.13.Bretton Woods Failure.Why did the fixed exchange rate regime of 19451973 eventually fail?The fixed exchange rate regime of 19451973 failed because of widely diverging national m

34、onetary and fiscal policies,differential rates of inflation,and various unexpected external shocks.The U.S.dollar was the main reserve currency held by central banks was the key to the web of exchange rate values.The United States ran persistent and growing deficits in its balance of payments requir

35、ing a heavy outflow of dollars to finance the deficits.Eventually,the heavy overhang of dollars held by foreigners forced the United States to devalue the dollar because the United States was no longer able to guarantee conversion of dollars into its diminishing store of gold.16 Moffett/Stonehill/Ei

36、teman Fundamentals of Multinational Finance,Third Edition 14.EU and Euro Expansion.With so many new countries joining the EU in 2004,when will they officially move to the euroif ever?In January 2007,two more countries were added to the EUs growing membershipBulgaria and Romania.Their entry was littl

37、e more than two years after the EU had added 10 more countries to its ranks.As illustrated by Global Finance in Practice 3.2,to date only one of these new 12 members has actually adopted the euro.Although all members are expected to eventually replace their currencies with the euro,recent years have seen growing debates and continual postponements by the new members in moving towards full euro adoption.