Lecture 10 - Feb. 11th, 2019
The Politics of International Monetary Relations
David Bearce, “The Monetary Convergence Hypothesis”
Reading Notes *finish
- Mundell-Fleming framework: an economic model that (at its most basic level) describes
the existence of a monetary policy trilemma facing national policy makers.
- The model states that from a menu of three potential desirable economic conditions,
governments can achieve at most only two of the three at any time.
- These three
- Domestic monetary policy autonomy
- Refers to the ability of national governments to direct their monetary
policy instrument toward certain domestic economic objectives.
- External currency stability
- Defined as “fixing the national currency’s value relative to some external
benchmark”
- This is considered desirable because currency variability and
volatility potentially impede cross-border trade and investment
- Governments that achieve greater external currency stability are
said to have a more fixed de facto exchange rate regime.
- International capital mobility
- Refers to the ability of investors to move their money and capital
assets across international borders without government
interference.
- Potential downside: open financial markets allow for capital assets
to exit the domestic economy when local conditions become less
attractive relative to external investment opportunities.
- Thus, of the three, most national governments would admit to
prizing international capital mobility less than external currency
ability and domestic monetary policy autonomy.
Lecture Notes
The Politics of International Monetary Relations
International Medium of Exchange
The Functions of Money
- What does money do for us?
, Money serves as:
A medium of exchange
- i.e. in the middle of an exchange
- Without it, who you can trade with is much more limited (the probability of
someone having what you want and you having what they want is less)
- Having the ability to switch whatever you provide into something widely
desirable allows you to engage in many different exchanges.
A store of value
- A form of credit/a way to save over time
A unit of measure
- A way to measure the value of a good, and to compare different suppliers of the
same good, etc.
Money helps markets work…
- Important for markets to function smoothly
- Without a medium of exchange, markets become very difficult to operate.
How is money provided?
- Where does it come from?
- The government
Government action: Legal tender
- In the Renaissance (when gold was used as a medium of exchange) they could not create
more of it.
- Why are states the most important actors?
- Because they are sovereign; they claim to be the highest form of political
authority.
- Because they have this authority, they can impose legal tender.
- Legal tender says that if you want to operate a business within a jurisdiction, you must
accept the country’s currency as payment.
- Usually coercion alone does not work, however. The government also has to do
work to make the money attractive, while ensuring its usefulness.
Managing a money:
Confidence
- Is the money commanding confidence from the users?
- Believing that the money will be useful to you
- By restricting the amount of money that is available/making it more rare,
it can raise its value/ enstore confidence
The Politics of International Monetary Relations
David Bearce, “The Monetary Convergence Hypothesis”
Reading Notes *finish
- Mundell-Fleming framework: an economic model that (at its most basic level) describes
the existence of a monetary policy trilemma facing national policy makers.
- The model states that from a menu of three potential desirable economic conditions,
governments can achieve at most only two of the three at any time.
- These three
- Domestic monetary policy autonomy
- Refers to the ability of national governments to direct their monetary
policy instrument toward certain domestic economic objectives.
- External currency stability
- Defined as “fixing the national currency’s value relative to some external
benchmark”
- This is considered desirable because currency variability and
volatility potentially impede cross-border trade and investment
- Governments that achieve greater external currency stability are
said to have a more fixed de facto exchange rate regime.
- International capital mobility
- Refers to the ability of investors to move their money and capital
assets across international borders without government
interference.
- Potential downside: open financial markets allow for capital assets
to exit the domestic economy when local conditions become less
attractive relative to external investment opportunities.
- Thus, of the three, most national governments would admit to
prizing international capital mobility less than external currency
ability and domestic monetary policy autonomy.
Lecture Notes
The Politics of International Monetary Relations
International Medium of Exchange
The Functions of Money
- What does money do for us?
, Money serves as:
A medium of exchange
- i.e. in the middle of an exchange
- Without it, who you can trade with is much more limited (the probability of
someone having what you want and you having what they want is less)
- Having the ability to switch whatever you provide into something widely
desirable allows you to engage in many different exchanges.
A store of value
- A form of credit/a way to save over time
A unit of measure
- A way to measure the value of a good, and to compare different suppliers of the
same good, etc.
Money helps markets work…
- Important for markets to function smoothly
- Without a medium of exchange, markets become very difficult to operate.
How is money provided?
- Where does it come from?
- The government
Government action: Legal tender
- In the Renaissance (when gold was used as a medium of exchange) they could not create
more of it.
- Why are states the most important actors?
- Because they are sovereign; they claim to be the highest form of political
authority.
- Because they have this authority, they can impose legal tender.
- Legal tender says that if you want to operate a business within a jurisdiction, you must
accept the country’s currency as payment.
- Usually coercion alone does not work, however. The government also has to do
work to make the money attractive, while ensuring its usefulness.
Managing a money:
Confidence
- Is the money commanding confidence from the users?
- Believing that the money will be useful to you
- By restricting the amount of money that is available/making it more rare,
it can raise its value/ enstore confidence
