study sheet2 - Review for exams 2 Here is a list with all...

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Review for exams 2 Here is a list with all the material covered in exam 2. Good luck!!! In class material 1. Macroeconomic Policy Trilemma - What it is? -You want to have these policy choices -Fixed exchange rates -Free movement of capital -Independent monetary policy -But only two of these three can be attained at the same time - Who proposed the original concept? -Robert Mundell; The Impossible Trinity 2. Free movements of capital - Requirements -In order to free up its financial markets and join the world financial and monetary system, a country needs to: -Open up currency transactions -Open up capital movements -Open up movement of goods - Asset markets - - Covered interest parity - Uncovered interest parity - UIRP and fixed exchange rates - UIRP and flexible exchange rates - Capital or exchange controls -Permits the domestic interest rate to be different from the world rate w/ fixed exchange rates -Disadvantages -Reduces the efficiency of international capital markets 3. Exchange Rate Regimes 4. How a Central Bank Carries Out Its Monetary Policy - Assets and liabilities -Central Banks do not set interest rates -Central banks buy and sell government securities to affect interest rates and exchange rates -Assets of the Central Bank -The value of domestic securities held by a central bank is called domestic credit -Foreign securities are denominated in foreign currency. Most frequently these are bonds issued by foreign governments. Foreign securities are foreign reserves. - Monetary policy – open market operations and foreign exchange intervention - How to fix exchange rates with free movement of capital – using the monetary tool
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-Central Bank needs to direct monetary policy towards keeping the domestic interest rate equal to the world interest rate -Keep the expected depreciation equal zero -Cannot direct monetary policy towards other objectives 5. Back to the Macroeconomic Policy Trilemma - Only two of these three objectives can be attained simultaneously – 3 cases.Why? - Examples (US, Eurozone and China) -Fixed exchange rates and free movement of capital -Cannot have independent monetary policy -Monetary policy directed towards fixing the domestic interest rate at the world interest rate -Cannot be directed towards other objectives such as inflation or unemployment -Fixed exchange rates and independent monetary policy
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This note was uploaded on 04/16/2008 for the course INTB 3353 taught by Professor Prodan during the Spring '08 term at University of Houston.

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study sheet2 - Review for exams 2 Here is a list with all...

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