Term
| Balance on Investment Income |
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Definition
| Flow item, balance of payment income, current acct. |
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Term
| Net international investment |
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Definition
| Stock item, stock of US - Liabilities |
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Term
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Definition
| Ommitted and misrecorded transactions; Balance on Capital Acct and statistical discprepancy is close to current acct balance => May suggest that financial transactions are responsible for the discrepancy |
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Term
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Definition
Special Drawing Rights
IMF created, electronic currency in IMF accounts
* look for in slides |
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Term
| Nominal vs. Real Exchange Rate |
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Definition
Nominal ER: # of units for one currency for another
Real ER: Purchasing power of currency for same basket of goods in two different countries
SxP*/P |
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Term
| Depreciate vs. Appreciate |
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Definition
Depreciate- The value of your currency weakens relative to others, floating
Appreciate- The value of your currency gets stronger relative to others |
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Term
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Definition
Devalue- Fixed exchange rate regime, central bank announces a change in the par value of its currency
Instead of $2 = Y10
the par value is now $1 = Y10 |
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Term
| T/F: Under a flexible exchange rate regime, the current account balance must equal the negative of the capital account balance |
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Definition
BOP = CA + KA + CR + SD = 0
CR = 0 in floating regime and assum SD to be 0
So... BOP=> CA = - KA =>TRUE |
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Term
| T/F: Under a fixed exchange rate regime, a country's ability to run repeated BOP deficits is limited by its supply of official reserves. |
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Definition
BOP deficit means Imports > Exports
Needs foreign currency to buy imports
Supply of domestic currency is high in currency market, CB has to buy domestic currency & sell foreign currency, at some point CB will run out of foreign currency reserves
=> TRUE |
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Term
| T/F: Countries with large numbers of citizens working overseas usually have GDP>GNP |
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Definition
GNP = GDP + Output of frms abroad - Output of foreign firms and individuals in country
If output of firms abroad is large then GNP>GDP
=> FALSE |
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Term
| If I added up all the current account balances in the world, would the sum equal zero? What about the sum of all the capital account balances? |
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Definition
Current Account - In Flexible, YES
Capital Account - In Flexible, YES
In floating exchange: CR = 0 and E = 0
So BOP= CA + KA
* Fixed Exchange has CR in equation |
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Term
| What are the immediate and long run entries in the BOP accounts from the sale of bonds to foreigners? |
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Definition
Capital Acct. (Principle) - Money in to the US is a Credit
Current Acct. (Interest Payments) - Money out is a Debit
Sell Bond (Money in)
Pay Interest (money out of current acct.)
Pay Principle (Money out of Capital acct.) |
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Term
| The US current acct deficit grew over the 1981-85 and the 1994-99 periods, yet the dollar appreciated. Why is this? What does this tell us about the line of causality between the current and capital accounts? |
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Definition
Imports>Exports
In all periods there was rapid growth =>means high real returns, this attracts capital inflows, had to buy dollars to buy US assets, demand for dollar was high
Capital Account is driving what is happening in Current account
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Term
| A 3/02 WSJ article noted that the Polish current account deficit had fallen from about 8% of GDP in 3/2000 to 4% in 2002. Using the elasticity approach, guess what happened to cause this. Now use the absorption approach to guess what happened. |
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Definition
Elasticity approach: Currency got weaker, exports increased, lower imports
CA = X - M
Absorption approach: Polands spending habits changed
CA = Y-E = (S-I) + (T-G) |
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Term
| A March 12, 1997 WSJ article stated "Since 1994, when Brazil pegged its currency to the US dollar to subdue inflation, the trade balance has swung from a $10.4b surplus to a $5.5b deficit last year." Whats probably going on here? In other words, whats causing the change in the trade balance? |
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Definition
CA = X - M
Brazilian purchasing power is increasing so they buy more imports, exports drop due to high brazilian prices
* Real exchange rate appreciation |
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Term
| The US government has recommended to Baghdad that it temporarily remove all duties and import tarrifs on cross border trade,essentially creating a duty free zone the size of california. How should this change affect Iraq's current account balance? |
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Definition
CA = X - M
Duty is a tax on exports
Tarrifs is a tax on imports
All trade levels should go up but which increases more is difficult to determine |
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Term
| In 2009 the US government budget deficit as a percent of GDP was 9.5%, while Japan's deficit was 10.4% of their GDP. How is it possible that the US could have a current account deficit and Japan a current account surplus? |
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Definition
CA = Y-E = (S-I) + (T-G)
US (-) Savings Low
JP (+) Savings High |
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Term
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Definition
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Term
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Definition
| Tarrif on imported goods established in 1930's after recession, caused a back-lash on US exports and trade dropped globally very quickly |
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Term
| Beggar thy neighbor policies |
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Definition
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Term
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Definition
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Term
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Definition
HK, Bulgaria, Estonia, Lithuania
Commits to convert domestic currency on demand at fixed rate
Hold reserves equal at the fixed rate >= 100% of deomestic currency |
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Term
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Definition
Euro Central Bank
1999 Area wide monetary policy for europe
Bank regulation at National level, does not regulate banks |
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Term
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Definition
| Policies that stabilize currency and give breathing room as countries implement other policys or postpone difficult decisions |
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Term
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Definition
Unofficial
Semiofficial
Official
Another country replaces home currency with that of another country, usually US dollar
Lose all monetary policy
-El Salvador
Panama
Equador |
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Term
| The US government is largely responsible for the establishment and rapid growth of the Eurodollar Market |
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Definition
TRUE; but there were others as well that played major rolls, Soviet Union and UK more so responsible
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Term
| Commercial bankers caused the LDC debt crisis by pushing too much debt onto thrid world nations |
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Definition
| TRUE; Excess dollars, petro-dollars, unrealistic projections and other problems as well. Politicians pushed them to lend, and the countries mismanaged and misallocated funds |
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Term
| The Louvre Accord set the same goals, and proposed the same set of actions as the Plaza Accord |
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Definition
FALSE; Plaza Accord tried to bring $ down, Louvre Accord tried to stop the fall of the $.
Different goals and different set of actions
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Term
| The Major advantage of a fixed exchange rate regime is that it sets strict limits on a nation's Monetary Policy |
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Definition
TRUE/FALSE; can argue either way just support the statement
This is TRUE if you dont trust your CB |
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Term
| Australia and New Zealand have extensive trade with each other; therefore, they should fix the value of their exchange rates. |
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Definition
Optimal Currency Area as reference;
TRUE => if they have integrated economy
FALSE => if trade balances will make this difficult |
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Term
| The only difference bewtween a currency board and a cetral bank in a fixed exchange rate regime is that currency boards maintain a reserve currency cover of >= 100%, while reserve currency cover in a fixed exchange rate regime with a central bank is usually<100% |
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Definition
FALSE; there are many differences between Currency Board and Central Bank
Currency Board cannot act as lender of last resort and haas no monetary policy flexibility
Look at notes, many others |
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Term
| Currency devaluations always lead to inflation. |
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Definition
FLASE; There are other assumptions that must be true in order for devaluation to lead to inflation.
The most important is that imports are a large part of consumption, then imports become more expensive and workers demand higher wages, companies then raise prices of goods and inflation spiral begins |
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Term
| The recent collapse of Argentina's Currency Board suggest thaat currenct boards are never a good idea. |
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Definition
| FALSE; Currency Boards can be good, they offer stability and credibility when high inflation is present and when Central Bank is new, but have to get out at the right time, when on top |
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Term
| Unofficial Dollarization makes both the demand for money and the banking sector less stable. |
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Definition
| FALSE; Dollarization does make the demand for local currency less stable, but it makes the banking sector more stable because it holds more dollars ($'s) |
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Term
| What are the conditions under which central bank intervention in the currency markets is likely to change a currency's value? |
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Definition
In order for a Central Banks intervention in the currency markets to be successful, the following must be true:
- First time
- In addition to other fiscal and monetary policies
- Working in coordination with other Central Banks, otherwise too small
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Term
| What are the key differences (or, biases) between those who advocate fixed exchange rates and those who advocate floating exchange rates? |
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Definition
Pro Float - stable xr are not desireable, the govt is sound on inflation, external disciplines do not work, world markets are not integrated, real wages are easier to cut than nominal wages, and the xr is well behaved
Pro Fixed - opposite of these views |
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Term
| How has the need for liquidity driven the evolution of the internation financial system? What implications does this have for a return to the gold standard? |
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Definition
Gold didnt grow fast enough, markets need liquidity to function smoothly
A return to the gold standard is very unlikely
*look for slide |
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Term
| One weakness of the dollar standard or fixed exchange rate regimes is "asymmetric adjustment" This implies that only one group of countries must adjust to BOP imbalances. Which group does NOT have to adjust and why? Is their response really costless? What are the long-run implications of their actions to avoid the BOP adjustment mechanism? |
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Definition
Surplus country does not have to adjust because they can sterilize excess currency by selling bonds and taking in currency
Not costless b/c they have to offer higher interest rates in the long-run b/c buyers need more incentive to buy more bonds |
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Term
| Use the currency Supply and Demand chart and the central bank's balance sheet to show what happened to the Thai Bhat in July 1997 |
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Definition
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Term
| An April 2003 WSJ article noted that the US government was airlifting dollars to Iraq to "replace- at least temporarily- the discredited Iraqi Dinar." What are the risks and benefits of this "temporary dollarization" Policy for Iraq? |
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Definition
Risks: lost seignorage, conversion costs, no more lender of last resort, lose some Monetary Policy tools, emotional costs
Benefits: Lower transaction costs, Lower reserves at banks, lower inflation, lower risk premium, greater economic openess and transparency, budgeting discipline |
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Term
| Germany and France account for 50% of the euro area GDP. Their economies, especially france, performed worse than the other euro economies in 2002. how does joining the euro affect thier ability to pull out of a recession? |
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Definition
| ECB limits individual countries ability to enact Monetary Policies, rely on regional policy. They do not have their own exchange rate |
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Term
| In 2003, the Economist magazine estimated that Hong Kong will suffer the world's most severe deflation in 2003. Prices there should drop by 2%. What does this imply for the real purchasing power of Hong Kong's residents relative to US goods? Will the pressure be for the Hong Kong dollar to appreciate of depreciate? Will the Hong Kong Monetary Authority accumulate or lose dollar reserves? Will this change in reserves exacerbate or offset deflationary pressures? |
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Definition
| This implies that Hong Kong's purchasing power relative to US goods will strengthen, they will be able to buy the same bundle of domestic goods for cheaper. The drop in prices of 2% will result in capital inflows, people will be selling foreign currencies to purchase Hong Kong dollars to buy goods from Hong Kong. This will create a greater demand for Hong Kong dollars and will result in upward pressures on their currency and pressure will be for the HK dollar to appreciate. The Hong Kong Monetary Authority will be selling HK dollars and taking in foreign currencies such as the dollar and they will accumulate dollar reserves. |
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