Lecture 4 - EC 60: Lecture 17 The International Monetary...

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EC 60: Lecture 17 The International Monetary System  1870-1973 http://www.youtube.com/watch? v=Lvn0fH3hgeU
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Announcements Exams will be returned in sections today  and tomorrow. Students who failed to answer question 4,  the make-up is scheduled for Friday 9:00  a.m., Braker 308.  You will have 20  minutes to complete a replacement  question. Questions about grading should be  submitted in writing to your TA.
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Balance of Payments Crises Brazil 1998-1999 example Struggles to cope with the debt crisis of  the 1980s left Brazil with a severe inflation. 1994 – Brazil created a new currency  called the  real . Initially the  real  was pegged to the US  dollar. The peg was replaced by a crawling  exchange rate.
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The problem The rate of inflation in Brazil was faster  than the rate of depreciation. Remember this equation?  If the price  level in Brazil rises faster than the  exchange rate, Brazilian stuff loses  competitiveness.
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The real appreciation of the  real The real appreciation of the Brazilian  real   started to drag down the Brazilian  economy. Bank failures, high unemployment and  high interest rates slowed the rate of  inflation. Inflation dropped from 2669% in 1994 to  10% in 1997.
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Foreign Exchange Market  Skepticism The Brazilian economy did not begin to  grow even after inflation was controlled. The  real   remained over-valued. Speculators began to suspect that the  real   was going to be devalued. Investors, fearing a devaluation, required  high interest rates to compensate for their  fears.
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Foreign Exchange Crisis Fall 1998 Investors became convinced a devaluation  was planned.  Speculators began dumping the  real . The Brazilian government had to  intervene, selling dollars and buying  real.   The interest rate in Brazil jumped from  20% to 45%.
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Here’s a picture Notice that in the fall of 1998 foreign reserves began to fall and the Interest rate began to rise.
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The IMF attempted to help  Brazil The IMF provided Brazil with a $40 billion  stabilization fund. The fund was to be used to sell dollars  and buy  real . The attacks continued.
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real January 1999, the  real  was devalued by 8  percent. The Brazilian government then allowed the  real   to float. Over the next month, the  real  lost another 40  percent of its value. By May 1999, the crisis was over.
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This note was uploaded on 04/29/2009 for the course ECONOMICS 60 taught by Professor D.brown during the Spring '09 term at Tufts.

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Lecture 4 - EC 60: Lecture 17 The International Monetary...

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