International coordination of economy
Essay at the end of the semester. About 4 pages. Notes, discussions, others,
questions on the chat.
LECTURE 1 International macroeconomic policy coordination: an overview.
A. Bretton Woods system
• Main goal- to promote full employment by managing aggregate demand
• Internal balance- exports are sufficiently competitive to meet full employment
import demand, along with interest payments abroad, after allowing for capital
inflows
Under the Bretton Woods System, gold was the basis for the U.S. dollar and other
currencies were pegged to the U.S. dollar’s value. The Bretton Woods System
effectively came to an end in the early 1970s when President Richard M. Nixon
announced that the U.S. would no longer exchange gold for U.S. currency.
Features, what was needed?
• Fixed- but-adjustable exchange-rate regime; everything fixed to a dollar, later it
changed- dollar to gold and other currencies to a dollar
• Limited trade controls (GATT); it is about decreasing obstacles in global trade, free
float in good and services, closer cooperation between countries
* Cold War
• Built-in incentive for “beggar-thy-neighbour’ policies; lower taxes, wages—> trade
is more competitive, it means the neighbour is in a worse position, competition
with low taxes and labour costs
—> Beggar thy neighbour is a term used for a set of policies that a country enacts
to address its economic woes that, in turn, actually worsens the economic problems
of other countries. The term comes from the policy's impact, as it makes a beggar
out of neighbouring countries.
NECESSITY OF THE POLICY COORDINATION
1
,Challenge
• Scarce currency clause —> Surplus countries in export (..) vs deficit countries in
export (Greece, Portugal…)
Option 1:
The country
can choose to have a free flow of capital among all foreign nations and also have an
autonomous monetary policy. Fixed exchange rates among all nations and the free
flow of capital are mutually exclusive. As a result, only one can be chosen at a time.
So, if there is a free flow of capital among all nations, there cannot be fixed
exchange rates.
Option 2: A country can choose to fix exchange rates with one or more countries
and have a free flow of capital with others. If it chooses this scenario,
independent monetary policy is not achievable because interest rate fluctuations
would create currency arbitrage stressing the currency pegs and causing them to
break.
Option 3 : If a country chooses fixed exchange rates and independent monetary
policy it cannot have a free flow of capital. Again, in this instance, fixed exchange
rates and the free flow of capital are mutually exclusive.
Collapse of the Bretton Woods system
2
, • It was a too big challenge, because rising amount international capital flows. Even
USA was enable to control it.
• In 1971, concerned that the U.S. gold supply was no longer adequate to cover
the number of dollars in circulation, President Richard M. Nixon devalued the U.S.
dollar relative to gold. After a run on gold reserve, he declared a temporary
suspension of the dollar’s convertibility into gold.1 By 1973 the Bretton Woods
System had collapsed. Countries were then free to choose any exchange
arrangement for their currency, except pegging its value to the price of gold. They
could, for example, link its value to another country's currency, or a basket of
currencies, or simply let it float freely and allow market forces to determine its
value relative to other countries' currencies
Rules of the monetary policy
• The inflation targeting system
• NAIRU
• Floating change rates
Two country model
• US and Europe
• USir—> full employment (internal balance)
• EUir—> full employment (internal balance)
• What if USir = EUir?
The economic and monetary union
• Core- periphery imbalances
• Divergences in inflation rates
• The stability and Growth Pact
Two country model
• US and China
• China—> SAVINGS- investment = demand
saving up= demand down
3
Essay at the end of the semester. About 4 pages. Notes, discussions, others,
questions on the chat.
LECTURE 1 International macroeconomic policy coordination: an overview.
A. Bretton Woods system
• Main goal- to promote full employment by managing aggregate demand
• Internal balance- exports are sufficiently competitive to meet full employment
import demand, along with interest payments abroad, after allowing for capital
inflows
Under the Bretton Woods System, gold was the basis for the U.S. dollar and other
currencies were pegged to the U.S. dollar’s value. The Bretton Woods System
effectively came to an end in the early 1970s when President Richard M. Nixon
announced that the U.S. would no longer exchange gold for U.S. currency.
Features, what was needed?
• Fixed- but-adjustable exchange-rate regime; everything fixed to a dollar, later it
changed- dollar to gold and other currencies to a dollar
• Limited trade controls (GATT); it is about decreasing obstacles in global trade, free
float in good and services, closer cooperation between countries
* Cold War
• Built-in incentive for “beggar-thy-neighbour’ policies; lower taxes, wages—> trade
is more competitive, it means the neighbour is in a worse position, competition
with low taxes and labour costs
—> Beggar thy neighbour is a term used for a set of policies that a country enacts
to address its economic woes that, in turn, actually worsens the economic problems
of other countries. The term comes from the policy's impact, as it makes a beggar
out of neighbouring countries.
NECESSITY OF THE POLICY COORDINATION
1
,Challenge
• Scarce currency clause —> Surplus countries in export (..) vs deficit countries in
export (Greece, Portugal…)
Option 1:
The country
can choose to have a free flow of capital among all foreign nations and also have an
autonomous monetary policy. Fixed exchange rates among all nations and the free
flow of capital are mutually exclusive. As a result, only one can be chosen at a time.
So, if there is a free flow of capital among all nations, there cannot be fixed
exchange rates.
Option 2: A country can choose to fix exchange rates with one or more countries
and have a free flow of capital with others. If it chooses this scenario,
independent monetary policy is not achievable because interest rate fluctuations
would create currency arbitrage stressing the currency pegs and causing them to
break.
Option 3 : If a country chooses fixed exchange rates and independent monetary
policy it cannot have a free flow of capital. Again, in this instance, fixed exchange
rates and the free flow of capital are mutually exclusive.
Collapse of the Bretton Woods system
2
, • It was a too big challenge, because rising amount international capital flows. Even
USA was enable to control it.
• In 1971, concerned that the U.S. gold supply was no longer adequate to cover
the number of dollars in circulation, President Richard M. Nixon devalued the U.S.
dollar relative to gold. After a run on gold reserve, he declared a temporary
suspension of the dollar’s convertibility into gold.1 By 1973 the Bretton Woods
System had collapsed. Countries were then free to choose any exchange
arrangement for their currency, except pegging its value to the price of gold. They
could, for example, link its value to another country's currency, or a basket of
currencies, or simply let it float freely and allow market forces to determine its
value relative to other countries' currencies
Rules of the monetary policy
• The inflation targeting system
• NAIRU
• Floating change rates
Two country model
• US and Europe
• USir—> full employment (internal balance)
• EUir—> full employment (internal balance)
• What if USir = EUir?
The economic and monetary union
• Core- periphery imbalances
• Divergences in inflation rates
• The stability and Growth Pact
Two country model
• US and China
• China—> SAVINGS- investment = demand
saving up= demand down
3
