Chapter 11
Chapter 11
Chapter 11
Introduction
Introduction
Tr
ad
trade
e
• Inconvenient to ship
gold, changed to paper- Japan USA
redeemable for gold
• Want to achieve
‘balance-of-trade
equilibrium Go
ld
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Decreased
money supply Trade Surplus
= price decline.
Increased
Gold money supply
= price
inflation.
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Bretton Woods
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• Discipline
- Maintaining a fixed exchange rate imposes monetary
discipline, curtails inflation
- Brake on competitive devaluations and stability to the
world trade environment
• Flexibility
- Lending facility:
• Lend foreign currencies to countries having balance-of-
payments problems
- Adjustable parities:
• Allow countries to devalue currencies more than 10% if
balance of payments was in “fundamental disequilibrium”
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Collapse of the
Fixed Exchange System
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Collapse of the
Fixed Exchange System
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• Floating: • Fixed:
- Monetary policy autonomy - Monetary discipline
• Restores control to - .Speculation
government - Limits speculators
- Trade balance adjustments - Uncertainty
• Adjust currency to correct
- Predictable rate movements
trade imbalances
- Trade balance adjustments
- Argue no link between
exchange rates and trade
• Link between savings and
investment
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Mexican Currency
Crisis of 1995
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Government Actions:
Exacerbating the Situation
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0
1992 1993 1994 1995
-1000
-2000
-3000
-4000
-5000
-6000
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• Cronyism
• Too much money, dependence on speculative capital
inflows
• Lack of transparency in the financial sector
• Currencies tied to strengthening dollar
• Increasing current account deficits
• Weakness in the Japanese economy
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• Inappropriate policies
- The IMF’s ‘one-size-fits-all’ approach to macroeconomic
policy is inappropriate for many countries
• Moral hazard
- People behave recklessly when they know they will be
saved if things go wrong
• Lack of Accountability
- The IMF has become too powerful for an institution that
lacks any real mechanism for accountability
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• Currency management
• Business strategy
- Faced with uncertainty about the future value of currencies,
firms should utilize the forward exchange market to insure
against exchange rate risk
- Firms should pursue strategies that will increase the
company’s strategic flexibility in the face of unpredictable
exchange rate movements — that is, to pursue strategies
that reduce the economic exposure of the firm
• Corporate-government relations
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