week10 - International Macroeconomic Policy Viktoria...

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Unformatted text preview: International Macroeconomic Policy Viktoria Hnatkovska week 10 1 Introduction & There is inherent interdependence of national economies. & The channels of interdependence are determined by the monetary and exchange rate arrange- ments that countries adopt. & Such set of institutions is called the international monetary system. & Consider three periods: & the gold standard era (1870-1914) & the interwar period (1918-1939) & Bretton Woods agreement (1946-1973) & Such arrangements in&uence the e/ectiveness of policies targeted to achieve two typical macroeconomic policy objectives in open economies: & internal balance (full employment with price stability) & external balance (avoiding excessive imbalances in balance of payments). 2 Macroeconomic policy goals & Internal balance ¡describes the macroeconomic goals of producing at potential output (or at &full employment¡or with sustainable and e/ective use of resources) and of price stability (or low in¢ation). & An unsustainable use of resources (over-employment) tends to increase prices and an inef- fective use of resources (underemployment) tends to decrease prices. & Volatile aggregate demand and output tend to create volatile prices. & Volatile prices makes planning for the future more di£ cult, imposes a cost of adjusting prices, and arbitrarily redistributes income between lenders and borrowers. 3 Macroeconomic policy goals & External balance ¡describes a current account that is not &too¡negative or &too¡posi- tive. & An external imbalance per se is not a bad thing. Why? & But, large current account de&cits can be problematic: & A large current account de¢cit channelled into temporarily higher consumption or into misguided government spending can be di£ cult to repay: requires domestic external target. & A large current account de¢cit can make foreigners think that an economy can not repay its debts and therefore make them stop lending, causing a ¢nancial crisis: external target is imposed by foreigners. & Large current account surpluses can be problematic: & A large current account surplus can lead to low domestic investment. But often prefer domestic to foreign investment as the former is easier to tax; can help with internal goals (lower domestic unemployment); and can generate positive technological spillovers. & A large current account surplus may re¤ect excessive borrowing by foreigners and never be repaid. 4 & A large current account surplus can cause protectionist or other political pressure by foreign governments (ex., pressure on Japan in the 1980s and China in the 2000s from US and Europe). 5 Gold Standard, Revisited & The gold standard had its origins in the use of gold coins as a medium of exchange, unit of account and store of value....
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This note was uploaded on 05/06/2010 for the course ECON Econ 365 taught by Professor Hnatkovska during the Spring '09 term at UBC.

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week10 - International Macroeconomic Policy Viktoria...

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