The trilemma of international finance policy choice

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Unformatted text preview: te Can have a stable exchange rate Policy goal: monetary policy independence Example: US 1/27/2014 Page: 31 Policy goal: Exchange rate stability Policy goal: Financial integration Easy to move money in and out of the country GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 3. The trilemma of international finance Policy choice: Closed financial markets Can choose interest rate Can have a stable exchange rate Policy goal: monetary policy independence Example: China 1/27/2014 Page: 32 Policy goal: Exchange rate stability Policy goal: Financial integration Easy to move money in and out of the country GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 16 3. The trilemma of international finance Policy choice: Relinquish monetary independence Policy goal: monetary policy independence Example: Euro zone 1/27/2014 Page: 33 Policy goal: Exchange rate stability Policy goal: Financial integration Easy to move money in and out of the country GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Takeaways Exchange rates and balance of payments • Exchange rate depends on: • Inflation (PPP) • Interest rates (IRP) • Trade balance (exports-imports) • Capital inflows Fiscal policy monetary policy Current account Inflation rate Interest rate Exchange rate 1/27/2014 Page: 34 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 17 End NEXT CLASS (WEDNESDAY): - Currencies in trouble: Exchange rate regimes and currency crises - Teaching note: Currency in Crises - News articles are posted on CTools 1/27/2014 35 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 18...
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