Weeks 4-6
Obstfeld - The trilemma in the interwar
period
Discussing rationale of trilemma
-when country pegs ER to another country and capital is able to flow
freely, by simple interest rate parity the IR in pegging country is pinned
down to the same as base country.
-ER could be fixed not to a given rate but to a target zone within which it
can fluctuate, limit ER shifts, giving some autonomy of monetary policy.
-In 1913 ideology of classic gold standard still held sway, int. capital mar-
kets most integrated they have ever been leaving authorities little room
to maneuver. The rise of more democratic polities led to policy makers
seeking more autonomy than the old rules of the game provided.
-Findings supported Kindleberger's argument that there was a shift of
hegemonic financial power in inter-war period, Britain no longer unri-
valed power after WWI.
-analysis of findings shows that short-run IR movements in pegged
countries, especially in open capital flows, follow the base IR. The
trilemma was a constraint on countries with open capital flows and fixed
ERs
Odell - From London to Bretton-Woods
Interwar period:
-Britain with depreciated pound was seeing recovery but concerned with
war debt to US which was consuming 12% of its export earnings.
-Proposal of London conference arisen at Lausanne meeting in 1932 to
discuss ending German reparations payments.
-US could have taken leadership role to restabilize int. monetary sys-
tem.
1
, -1933 American behaviour exemplifies what is called exploitive or com-
petitive strategy. The actor unilaterally seeks to grab as big a piece of
pie as possible without looking to joint action to expand the pie. Making
secret deals, threatening negative sanctions, staking out commitments
and demands etc. it did not match this description completely but it heav-
ily goes in this direction.
-1943-45 US looks more like expansionary or partly expansionary bar-
gaining strategy. The actor proposes or agrees to actions which will ben-
efit both or many parties, including itself. Involves seeking alternative so-
lutions, open-ended search of problems to both parties, declaring needs
and preferences, establishing and reinforcing trust etc. Not perfect fit but
largely so, still exploiting to some extent.
-these two strategies present a dilemma in choosing one, have different
costs and benefits. Expansionary runs risk of being exploited, actor on
exploitive strategy may only realize limited gain.
-Third course called passive strategy: simply avoids negotiations and ac-
tive measures which disadvantage others. Sometimes coincides with
Laissez-faire, actors always have option of leaving it to market.
Game theory:
-Difficult to have confidence in any predictions it makes when actually
applied to cases, oversimplification of state preferences reduce compre-
hension, as states often have many conflicting interests and form com-
plex payoff tables if actually considered. Game theory always relies on
ad hoc explanations.
Int. power structure:
-US led the world to create IMF in 1944 because it had hegemonic
power. Literature exaggerates power a bit too much, discrepancies in
historical record. Reason US did not take lead in 1933 is not lack of int.
power. Claims US was already superpower in 1910s, made up very
large portion of world trade see page 294, 43% of world's int. invest-
ments in 1920s came from US. If US power created interest to create
IMF then this interest should have existed long before 1944. US could
have benefited just as much in 1933, power is relevant though, limits
state actions and bargaining outcomes. Has similar problem to game
theory, insufficient to identify for what states use their power.
2
Obstfeld - The trilemma in the interwar
period
Discussing rationale of trilemma
-when country pegs ER to another country and capital is able to flow
freely, by simple interest rate parity the IR in pegging country is pinned
down to the same as base country.
-ER could be fixed not to a given rate but to a target zone within which it
can fluctuate, limit ER shifts, giving some autonomy of monetary policy.
-In 1913 ideology of classic gold standard still held sway, int. capital mar-
kets most integrated they have ever been leaving authorities little room
to maneuver. The rise of more democratic polities led to policy makers
seeking more autonomy than the old rules of the game provided.
-Findings supported Kindleberger's argument that there was a shift of
hegemonic financial power in inter-war period, Britain no longer unri-
valed power after WWI.
-analysis of findings shows that short-run IR movements in pegged
countries, especially in open capital flows, follow the base IR. The
trilemma was a constraint on countries with open capital flows and fixed
ERs
Odell - From London to Bretton-Woods
Interwar period:
-Britain with depreciated pound was seeing recovery but concerned with
war debt to US which was consuming 12% of its export earnings.
-Proposal of London conference arisen at Lausanne meeting in 1932 to
discuss ending German reparations payments.
-US could have taken leadership role to restabilize int. monetary sys-
tem.
1
, -1933 American behaviour exemplifies what is called exploitive or com-
petitive strategy. The actor unilaterally seeks to grab as big a piece of
pie as possible without looking to joint action to expand the pie. Making
secret deals, threatening negative sanctions, staking out commitments
and demands etc. it did not match this description completely but it heav-
ily goes in this direction.
-1943-45 US looks more like expansionary or partly expansionary bar-
gaining strategy. The actor proposes or agrees to actions which will ben-
efit both or many parties, including itself. Involves seeking alternative so-
lutions, open-ended search of problems to both parties, declaring needs
and preferences, establishing and reinforcing trust etc. Not perfect fit but
largely so, still exploiting to some extent.
-these two strategies present a dilemma in choosing one, have different
costs and benefits. Expansionary runs risk of being exploited, actor on
exploitive strategy may only realize limited gain.
-Third course called passive strategy: simply avoids negotiations and ac-
tive measures which disadvantage others. Sometimes coincides with
Laissez-faire, actors always have option of leaving it to market.
Game theory:
-Difficult to have confidence in any predictions it makes when actually
applied to cases, oversimplification of state preferences reduce compre-
hension, as states often have many conflicting interests and form com-
plex payoff tables if actually considered. Game theory always relies on
ad hoc explanations.
Int. power structure:
-US led the world to create IMF in 1944 because it had hegemonic
power. Literature exaggerates power a bit too much, discrepancies in
historical record. Reason US did not take lead in 1933 is not lack of int.
power. Claims US was already superpower in 1910s, made up very
large portion of world trade see page 294, 43% of world's int. invest-
ments in 1920s came from US. If US power created interest to create
IMF then this interest should have existed long before 1944. US could
have benefited just as much in 1933, power is relevant though, limits
state actions and bargaining outcomes. Has similar problem to game
theory, insufficient to identify for what states use their power.
2
