im22 - Chapter 22 The International Financial System and...

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Chapter 22 The International Financial System and Monetary Policy Overview A discussion of monetary policy in the new century is incomplete without a thorough consideration of international financial linkages. The chapter begins by considering the effects of foreign-exchange interventions by the central bank. The model of exchange rate determination developed in Chapter 8 is used to analyze the effects of sterilized and unsterilized interventions. The chapter moves on to discuss the reasons for central bank intervention. The discussion is illustrated by an examination of the interventions pursued during the 1980s by the Reagan administration. The chapter includes a fairly detailed review of balance of payments accounting. This material may be familiar to students from their intermediate macroeconomics courses; if not, going over it with some care is important. An overview of exchange rate regimes and international finance is presented. This discussion begins with the pre-1914 gold standard, continues with a detailed description of the operation of the Bretton Woods system, and ends by examining the operation of the post-Bretton Woods system. The chapter concludes with a review of the issues involved in establishing a European monetary union. Outline I. Foreign-Exchange Intervention and the Money Supply A) Because international financial markets are linked, foreign central banks, foreign private banks, and foreign savers and borrowers can affect the domestic money supply. B) Foreign-exchange market intervention refers to deliberate actions by a central bank to influence the exchange rate. C) Foreign-exchange market interventions alter a central bank’s holdings of international reserves , assets that are denominated in a foreign currency and used in international transactions. D) A purchase or sale of foreign assets by a central bank has the same effect on the monetary base as an open market purchase or sale of government bonds. E) When a central bank allows the monetary base to respond to the sale or purchase of domestic currency in the foreign-exchange market, the transaction is called an unsterilized foreign- exchange intervention .
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127 Hubbard • Money, the Financial System, and the Economy, Sixth Edition II. Foreign-Exchange Intervention and the Exchange Rate A) Central banks and governments seek to minimize changes in exchange rates. 1. A depreciating domestic currency raises the cost of foreign goods and may lead to inflation. 2. An appreciating domestic currency can make a country’s goods uncompetitive in world markets. B) An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency leads to a decrease in international reserves and in the money supply and an appreciation of the domestic currency. C)
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This note was uploaded on 09/11/2011 for the course ECON 304 taught by Professor Sanchez during the Fall '11 term at NMSU.

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im22 - Chapter 22 The International Financial System and...

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