Wk15_22Nov_Ch21_ExRegimesOPAeu

Wk15_22Nov_Ch21_ExRegimesOPAeu - Week 15: Tues, Nov. 22,...

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Ch. 21 International Lending and Financial Crises Last Reading Assignment: Focus on pages 526-527 and 530-539. Week 15: Tues, Nov. 22, 2011
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Finish PPP History of Exchange Rate Systems Main Types of Exchange Rate Regimes The Trillema Optimum Currency Areas International Lending & Financial Crisis Today
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Remaining Issue w/ PP Thursday: ∆’s in P’s ∆’s in e d/f ’s Data show a correlation between price changes and exchange rates nearly 1 What determines P’s?
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A Theory of Long Run Price Levels Quantity Theory of Money Demand for Money: Md = k P Y Supply of Money: Ms = set by government In equilibrium Ms = Md Ms = kPY Solving for P P = Ms/kY
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A Theory of Long Run Price Levels Domestic Price Level: P = M/k P Y • Foreign Price Level: P f = M f /k f Y f The nominal exchange rate e d/f = P/P f = (M/M f ) (k f /k d ) (Y f /Y)
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A Theory of Long Run Price Levels In percentage terms: (∆e d/f )/e d/f = (∆P d )/P d - (∆P f )/P f = (%∆M - %∆M f ) + (%∆Y f - %∆Y) In long run, growth of M leads to depreciation In long run, growth of Y lead to
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Summary Short-run • C-irp links e d/f , i d , i f and f d/f • U-irp links e d/f , i d , i f and e d/f Long-run A-PPP links e d/f , P d and P f Violated systematically if poor nation R-PPP links %∆e d/f and %∆P’s QTM links %∆e d/f , %∆M’s, and
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History of Exchange Rate Systems
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The International Currency Experience 1. The Gold Standard, 1870-1914 2. The Interwar Period, 1918-1940 Breakdown of the gold standard Period of financial instability 1. The Bretton Woods Period, 1944-1971 2. The Current “Nonsystem” Period, 1973- Present
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1. The Gold Standard, 1870-1914 Gold standard emerged in early 1800s. UK adopted the gold standard in 1821 During 1870s adopted by all industrial nations. The US began with a silver standard, adopted bimetallic standard in 1792, then sharply increased gold’s status in 1873 until gold became the sole standard in 1900. Australia in 1852 Canada in 1853 France in 1878 Germany in 1871 Suspended in 1914 w/ breakout of WWI.
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Problem With Gold Standard Increases in money supply tied to gold discoveries. Every instance of gold discovery led to worldwide inflation. Growing economies need rising money supply needs (liquidity) otherwise fixed money supply causes deflation . Prices must fall so money supply goes further
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2. The Interwar Period, 1918- 1940 Period of financial instability Breakdown of the gold standard Massive Number of Sovereign Defaults in 1930 Nearly every developing nation defaulted on their debts. Private lending to poor nations remains low for next 40 years.
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3. Bretton Woods System, 1944- 1971 Fixed Exchange Rate System Dollar pegged/fixed to gold Other currencies pegged/fixed to U.S. dollar Dollar to serve as international reserve U.S. agreed to redeem dollars submitted by
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Wk15_22Nov_Ch21_ExRegimesOPAeu - Week 15: Tues, Nov. 22,...

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