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Currency Trading Has a Long History

Currency trading dates backs to ancient times. In medieval times, coins were minted from gold or silver and circulated freely across Europe's borders of that time. Foreign exchange traders provided a form of coinage to lessen worries that another currency might not contain the proper amount of a precious metal promised. And when paper money came into vogue in the eighteenth century, its value was still determined by the amount of precious metal that the government promised to pay the bearer. Even after the main industrial nations stopped linking their currencies to gold and silver in the 1920s and 1930s, governments tried to keep the rates of conversion relatively stable between currencies. The Bretton Woods system created in Bretton Woods, New Hampshire, at the end of World War II was a system of fixed rates. But in the late 1960s, the system began to break down, and in 1972, it was decided to let market forces determine exchange rates. It was the uncertainty created by this decision...

The Currency and Banking Debate

Issues from the Bullion Controversy reappeared in the Currency and Banking Debate. The Currency school, positing an endogenous cycle of real income (O'Brien, 1995), argued that if the money supply (Bank of England notes) were regulated in accordance with the Ricardian definition of excess - contracted whenever there was a balance-of-payments deficit - this could act countercyclically. A balance-of-payments deficit was due to a rising price (and income) level, indicating the need for monetary contraction. The Banking school's prescription of allowing the money supply to respond to the needs of trade would magnify the cycle and, by intensifying the price-level rise that had produced the balance-of-payments deficit, result in a gold outflow endangering the convertibility of the note issue into gold. Both disputants shared certain assumptions, including acceptance of the need for convertibility and of the key role of the Bank of England note issue in the money supply. Neither assumption...

The Essentials Of A Currency Board

Although not all currency boards are alike, they generally share three features. First (as stated above), there is a fixed exchange rate with some other currency(ies), which is codified, be it in a law or otherwise. In this respect, a currency board differs from a standard peg as the capacity to devalue is severely restricted by requiring parliamentary approval and other Table 6.1 Currency boards an overview Table 6.1 Currency boards an overview 100 of currency 100 of currency and liquid liabilities restrictions (Rivera Batiz and Sy, 2000). The anchor currency is generally chosen for its expected stability and international acceptability.5 A pure currency board arrangement is the strictest possible form of a fixed exchange rate regime, since there is, as a rule, no independent monetary policy (Pautola and Backe, 1998).6 This is due to the second characteristic of a currency board arrangement, the fact that the monetary base (or in the simplest case banknotes) is (are) backed by...

Currency Board Or Independent Central Bank

A high-inflation problem is an important motivation for countries in transition to consider introducing a currency board or a credible exchange rate peg. However, before a country decides in favour of a currency board, a proper comparison with the alternative of an independent and conservative (that is, inflation-averse) central bank should be made. Both alternatives have advantages and disadvantages and it is not always obvious what the optimum solution would be. Broadly following Berger et al. (2001b), we can illustrate this within a simple model of exchange rate regime choice. Alternatively, the country could opt for a currency board to govern monetary policy and credibly fix its exchange rate against a foreign currency of its choice (e 0). In this case the domestic inflation rate will equal the foreign inflation rate. To simplify, assume that the target country's (that is, the foreign) monetary policy suffers from an inflationary bias of size a and reacts to the foreign output...

Stock Bond and Currency Markets React Differently

Currency traders prefer healthy growth and higher interest rates. Both lead to increased demand for a local currency. However, inflationary pressures put pressure on a currency regardless of growth. For example, if the United Kingdom reports that the consumer price index has risen more than the Bank of England's 2 percent inflation target, demand for sterling could decline. Similarly, when the Bank lowered interest rates in 2005, the pound sterling weakened. (Currency traders also watch the interest rate spread between countries. But that is a topic for another day.)

Consequences Of Eurocurrency Markets

We illustrate the operation of the eurocurrency market (in this case the currency is dollars) with a simple stylized example. In this example the US banking system is consolidated to simplify the exposition by avoiding interbank transfers. The banks in the eurocurrency markets i.e., the eurobanks in our example keep their balances with US domestic banks in the form of a normal bank account. A UK trader receives payment for exports to the US to the value of 10m. Instead of converting the dollars into sterling, the UK trader deposits the dollars with eurobank A. Since this bank has no immediate use for the dollars, it redeposits via the money market the dollars with eurobank B, which lends the 10m to its customer. Table 5.5 illustrates the effect of these transactions on the balance sheet of the various operators. In scenario 1, there is no net effect on the US banking system because the dollars have merely been transferred from the US company to the UK trader and then to eurobank A by...

Extension of Probit Model I Currency Risk

We have mentioned the independent variables used by Balkan (1995) in his probit model of country risk. These variables range from debt service, GNP growth, to political instability indicators. However, one critical variable that is closely related to a country's ability for debt payments was ignored in Balkan's model. This variable is the currency stability of a country, which measures the stability of the exchange rates of a country's currency against major international currencies, such as the US dollar and the German mark. The stability of a currency can be measured in two ways. One measure is the volatility of the currency's exchange rate against US dollar or some other major international currency units. The volatility can be estimated either unconditionally from the historical data or conditionally by using ARCH-type time-series models. Another measure is the likelihood of a major currency depreciation or currency crisis. A currency crisis exists when there is abrupt currency...

Synthesis Of Currency And Banking Positions

In his discussion of the effects of credit on the general price level, Knies takes a position on the controversy between the currency and banking schools in England (1876 Ch. VI). He concludes that 'neither the banking theory nor the 'currency theory' can be endorsed', because both schools are wrong with regard to the role of bank notes (1876 286). Yet he constructs a synthesis of both theories that preserves the quantity-theoretical framework of the currency school, while making room for reverse causation from prices to the monetary aggregate, as postulated by the banking school.14 The trick of the synthesis is to define the volume of bank notes as a determinant of the velocity of money (1876 261-70). According to the currency principle, bank notes should be considered as money - not so according to Knies. In his view they are claims to money that function as substitutes in circulation only. If the volume of money proper (specie) is constant, an increase in the volume of circulating...

Expanding Behavior of the Currency Ratio

The general outline of the movements of the currency ratio c since 1892 is shown in Figure 1. As you can see, several episodes stand out A natural way to approach the analysis of the relative amount of assets (currency and checkable deposits) people want to hold, hence the currency-checkable deposits ratio, is to use the theory of asset demand developed in Chapter 5. Recall the theory states that four categories of factors influence the demand for an asset such as currency or checkable deposits (1) the total resources available to individuals, that is, wealth (2) the expected return on one asset relative to the expected return on alternative assets (3) the degree of uncertainty or risk associated with the return from this asset relative to the alternative assets and (4) the liquidity of one asset relative to alternative assets. Because risk and liquidity factors have not changed independently of wealth and expected returns and lead to similar conclusions on the historical movements of...

Why Paper Currency Is Accepted As A Means Of Payment

You may be wondering why people are willing to accept paper dollars as a means of payment. Why should a farmer give up a chicken, or a manufacturer give up a new car, just to receive a bunch of green rectangles with words printed on them In fact, paper currency is a relatively recent development in the history of the means of payment. Commodity money eventually gave way to paper currency. Initially, paper currency was just a certificate representing a certain amount of gold or silver held by a bank. At any time, the holder of a certificate could go to the bank that issued it and trade the certificate for the stated amount of gold or silver. People were willing to accept paper money as a means of payment for two reasons. First, the currency could be exchanged for a valuable commodity like gold or silver. Second, the issuer either a government or a bank could only print new money when it acquired additional gold or silver. This put strict limits on money printing, so people had faith...

Optimum currency area F3

One currency or by a number of linked currencies, e.g. the european monetary system. The necessary conditions for an optimum area include wage and price flexibility and mobility of capital and labour. The social and political unity of the area is more important than its size. Setting up an area with a common currency brings about the adjustment costs of extra unemployment, reductions in residents' income and wealth and migration, which can be financed out of a joint fiscal policy for the area. Ishiyama, Y. (1975) 'The theory of optimum currency areas a survey', International Monetary Fund Staff Papers 22 344-83. Mundell, R.A. (1961) 'A theory of optimum currency areas', American Economic Review 51 657-65.

Commodity Reserve Currency

The gold standard as we knew it undoubtedly had some grave defects. But there is some danger that the sweeping condemnation of it which is now the fashion may obscure the fact that it also had some important virtues which most of the alternatives lack. A wisely and impartially controlled system of managed currency for the whole world might, indeed, be superior to it in all respects. But this is not a practical proposition for a long while yet. Compared, however, with the various schemes for monetary management on a national scale, the gold standard had three very important advantages it created in effect an international currency without submitting national monetary policy to the decisions of an international authority it made monetary policy in a great measure automatic and thereby predictable and the changes in the supply of basic money which its mechanism secured were on the whole in the right direction. It will be noticed that none of these points claimed in favour of the gold...

Supply And Demand For Loanable Funds And For Foreigncurrency Exchange

To understand the forces at work in an open economy, we focus on supply and demand in two markets. The first is the market for loanable funds, which coordinates the economy's saving and investment (including its net foreign investment). The second is the market for foreign-currency exchange, which coordinates people who want to exchange the domestic currency for the currency of other countries. In this section we discuss supply and demand in each of these markets. In the next section we put these markets together to explain the overall equilibrium for an open economy.

Digital Currency Payment Systems

Whereas electronic payment systems reviewed in the previous sections aim to adapt existing payment settlement processes to the open environment of the Internet, digital currency, also called electronic cash or electronic money, is a new development which has far-reaching commercial, monetary, and regulatory ramifications. One of the ways payment systems using digital currency differ from traditional electronic funds transfers is the transactional contents. In traditional EFT and many electronic payment systems proposed numbers or bank account information) is transmitted over the network. For those transactions, the primary concern of businesses and consumers is security. When security is breached, this information may be used without authorization. But, swift counter-measures can remedy the situation. In the case of digital currency, the monetary value is being transferred instead of payment information. This is akin to sending a 20 bill in the mail. An intercepted digital currency...

The Market For Foreigncurrency Exchange

The second market in our model of the open economy is the market for foreign-currency exchange. Participants in this market trade U.S. dollars in exchange for foreign currencies. To understand the market for foreign-currency exchange, we begin with another identity from the last chapter This identity states that the imbalance between the purchase and sale of capital assets abroad (NFI) equals the imbalance between exports and imports of goods and services (NX). When U.S. net exports are positive, for instance, foreigners are buying more U.S. goods and services than Americans are buying foreign goods and services. What are Americans doing with the foreign currency they are getting from this net sale of goods and services abroad They must be adding to their holdings of foreign assets, which means U.S. net foreign investment is positive. Conversely, if U.S. net exports are negative, Americans are spending more on foreign goods and services than they are earning from selling abroad this...

Digital Currency and Governments

After being created, digital currency can be traded on the global Internet, meaning that digital currency is necessarily an international issue. It is not unimaginable that you will see the last of foreign currency trading due to global digital currency. Equally likely, however, is that digital currencies may add to the number of existing international units of money, further complicating foreign exchange rates and trading. Despite these potentially serious impacts, the U.S. government's attitude toward digital currency is one of non-interference and sometimes one of promotion. The reasons for this policy can be summarized from recent remarks by the Federal Reserve chairman, Alan Greenspan (1996). First, in an environment without government intervention, private businesses are motivated to self-regulate. As firms compete for reputation and strive to inform consumers of their quality, they have ample incentive for self-regulation and industry-wide cooperation. Second, innovations...

Pw the European Single Currency Evolved

What factors made European leaders averse to fluctuations in the mutual exchange rates of their currencies How did the quest for exchange rate stability within Europe lead to the birth of the single European currency To understand how the euro evolved, we must start in the late 1960s, when currency crises were disrupting exchange rate relationships within Europe.

The Government and the Currency

The simplest and oldest variety of monetary intervention-ism is debasement coupled with legal-tender laws aimed at relieving the plight of debtors. The government inflates the currency so that its purchasing power falls, and then declares that debts contracted before the debasement can be paid off at par with the weaker currency. (Governments sometimes engage in deflation, where the stock of money shrinks and its purchasing power increases, which aids creditors at the expense of debtors. But in these situations, the aim was not to help the creditors this was simply a side effect of the policy.) 3. The Evolution of Modern Methods of Currency Manipulation A metallic currency is not easily subject to government manipulation, because attempts at debasement will lead to the effects described by Gresham's law. In this respect, hard money presents an obstacle to government's inflationary aims. The classical economists overlooked this benefit of a hard-money system, when they praised the...

Designing And Naming A New Currency

Among the ieast of the obstacles to achieving the comprehensive monetary union envisaged in the Maastricht Treaty are the choices of a look and a name for the new single European currency. Nonetheless, agreement was hard to reach. The new currency's name was another problem until euro was chosen in December 1995. The Maastricht Treaty, as previously noted, refers to the single currency as the ECU, but most European leaders thought it would be misleading and politically awkward to adopt the name of a preexisting currency basket and one that has depreciated sharply against the DM at that. A further problem was German chancellor Kohl's reported objection that in German ein ECU sounds like eine Kuh, German for a cow. * Other proposed names included the franken and the shilling. For some, christening the new currency euro was a reluctant compromise. Britain's prime minister complained that the name euro didn't send the blood coursing through his veins (unlike pound, presumably). The Greeks...

The Decision to join a Currency Area Putting the GG and LL Schedules Together

When the degree of integration is 0, or higher, however, the monetary efficiency gain measured by GG is greater than the stability sacrifice measured by LL, and pegging the krone's exchange rate against the euro results in a net gain for Norway. Thus the intersection of GG and LL determines the minimum integration level (here, 8,) at which Norway will desire to peg its currency to the euro. The GG-LL framework has important implications about how changes in a country's economic environment affect its willingness to peg its currency to an outside currency area. Consider, for example, an increase in the size and frequency of sudden shifts in the demand for the country's exports. As shown in Figure 20-7, such a change pushes LL1 upward to LL2 At any level of economic integration with the currency area, the extra

What Is an Optimum Currency Area

The GG-LL model we have developed suggests a theory of the optimum currency area. Optimum currency areas are groups of regions with economies closely linked by trade in goods and services and by factor mobility. This result follows from our finding that a fixed exchange rate area will best serve the economic interests of each of its members if the degree of output and factor trade among the included economies is high. The more interesting question, and the critical one forjudging the economic success of EMU, is whether Europe itself makes up an optimum currency area. We take up this topic next.

Is Europe an Optimum Currency Area

The theory of optimum currency areas gives us a useful framework for thinking about the considerations that determine whether a group of countries will gain or lose by fixing their mutual exchange rates. A nation's gains and losses from pegging its currency to an exchange rate area are hard to measure numerically, but by combining our theory with information on actual economic performance we can evaluate the claim that Europe, most of which is likely to adopt or peg to the euro, is an optimum currency area. Our earlier discussion suggested that a country is more likely to benefit from joining a currency area if the area's economy is closely integrated with its own. The overall degree of economic integration can be judged by looking at the integration of product markets, that is, the extent of trade between the joining country and the currency area, and at the integration of factor markets, that is, the ease with which labor and capital can migrate between the joining country and the...

Countervailing Inflow Dumping of Currency Abroad

One method of capital flight is to buy foreign currency. In 1940 in Switzerland, I met a man who had arranged to receive five 100 bills from New York each week, which he sold for about 650. He then sent 500 back by draft each week and lived on the difference. A large capital inflow to the United States outflow from Europe took place through currency movements reported by banks, but more much more contributed to the residual debit in the US balance of payments through covert mail exports of US currency, and through purchases of currency through intermediaries in New York that were hidden in safe-deposit boxes. The counterpart of this US inflow, to the extent it was reported, was European capital flight, i.e. the increase in European holdings of US currency. In addition to buying currency at home, capital can be exported by selling domestic currency abroad. Various German, Italian, and especially Russian foreign-exchange controls were evaded by smuggling currency abroad and selling it...

Offshore Banking and Offshore Currency Trading

The growth of offshore currency trading has gone hand in hand with that of offshore banking. An offshore deposit is simply a bank deposit denominated in a currency other than that of the country in which the bank resides for example, yen deposits in a London bank or dollar deposits in Zurich. Many of the deposits traded in the foreign exchange market are offshore deposits. Offshore currency deposits are usually referred to as Eurocurrencies, something of a misnomer since much Eurocurrency trading occurs in such non-European centers as Singapore and Hong Kong. Dollar deposits located outside the United States are called Eurodollars. Banks that accept deposits denominated in Eurocurrencies (including Eurodollars) are called Eurobanks. The advent of the new European currency, the euro, has made this terminology even more confusing One motivation for the rapid growth of offshore banking and currency trading has been the growth of international trade and the increasingly multinational...

The Growth of Eurocurrency Trading

In 1957, at the height of a balance of payments crisis, the British government prohibited British banks from lending pounds to finance non-British trade. This lending had been a highly profitable business, and to avoid losing it British banks began financing the same trade by attracting dollar deposits and lending dollars instead of pounds. Because stringent financial regulations prevented the British banks' nonsterling transactions from affecting Britain's domestic asset markets, the government was willing to take a laissez-faire attitude toward foreign currency activities. As a result, London became and has remained the leading center of Eurocurrency trading. The history of Eurocurrencies shows how the growth of world trade, financial regulations, and political considerations all helped form the present system. The major factor behind the continuing profitability of Eurocurrency trading is, however, regulatory In formulating bank regulations, governments in the main Eurocurrency...

Effects of replacing central bank currency

We will examine electronic money's potential to replace central bank currency. For this, we will show how a representative agent would choose among various payment instruments once the latter exist. The following discussion is based on a model by Santomero and Seater (1996) in order to show what are the conditions and implications of an increasing use of electronic moneys.

Can Currency Boards Make Fixed Exchange Rates Credible

Argentina's 1991 monetary law requiring 100 percent foreign exchange backing for the monetary base made it an example of a currency board, in which the monetary base is backed entirely by foreign currency and the central bank therefore holds no domestic assets (Chapter 17). A major advantage of the currency board system, aside from the constraint it places on fiscal policy, is that the central bank can never run out of foreign exchange reserves in the face of a speculative attack on the exchange rate.17 Developing countries are often advised by observers to adopt currency board systems. How do currency boards work, and can they be relied on to insulate economies from speculative pressures In a currency board regime, a note-issuing authority announces an exchange rate against some foreign currency and, at that rate, simply carries out any trades of domestic currency notes against the foreign currency that the public initiates. The currency board is prohibited by law from acquiring any...

The Eurocurrency market

An important innovation in international banking occurred during the Bretton Woods era when commercial banks in several countries began to accept deposits and to extend loans in currencies other than their own national currency. We will briefly describe this activity, which was known as the Eurodollar market. As currencies other than the dollar became more central to its operation this became known as the Eurocurrency market, or merely as offshore banking. As noted in earlier chapters, creation and control of a nation's money are among the most sensitive and jealously guarded attributes of national sovereignty. Traditionally, it has been accepted that every nation has an exclusive right to coin and print its own money. When money actually took the form of coins and currency, this exclusive national privilege was generally respected, except by counterfeiters, and even when bank deposits became the principal form of money, the primacy of national control was respected - at least until...

Currency Boards and Crisis in Argentina

At the time of writing, there are 7 currency boards in operation Bosnia and Herzegovina, Brunei Darussalam, Bulgaria, Hong Kong SAR, Djibouti, Estonia, and Lithuania. The currency board in Dijbouti has been in place for nearly 50 years and in Hong Kong since 1985. More recently, Argentina instigated a currency board in 1991 but was forced to exit in 2001. As Figure 21.11 shows, currency boards have a good record in improving overall economic performance inflation, inflation volatility, the fiscal deficit, and growth all improve under a currency board compared to alternative regimes. Under a currency board, countries cannot print money not backed by foreign currency reserves, so the central bank can no longer finance the government's fiscal deficit. As a result, a currency board without fiscal reform is unworkable the pressure for the central bank to print money and abandon the currency board will become overwhelming. Therefore currency boards tend to be adopted as part of an overall...

Currency Crisis Index

The index is a weighted average of exchange rate and reserve changes, with weights such that the two components of the index have equal conditional volatilities. Since changes in the exchange rate enter with a positive weight and changes in reserves have a negative weight attached, readings of this index that were three standard deviations or more above the mean were cataloged as crises. For countries in the sample that had hyperinflation, the construction of the index was modified. While a 100 percent devaluation may be traumatic for a country with low to moderate inflation, a devaluation of that magnitude is commonplace during hyperinflations. A single index for the countries that had hyperinflation episodes would miss sizable devaluations and reserve losses in the moderate inflation periods, as the historic mean is distorted by the high-inflation episode. To avoid this, we divided the sample according to whether inflation in the previous six months was higher than 150 percent and...

E Theory of Optimum Currency Areas

In this section we show that a country's costs and benefits from joining a fixed-exchange rate area such as the EMS depend on how well-integrated its economy is with those of its potential partners. The analysis leading to this conclusion, which is known as the theory of optimum currency areas, predicts that fixed exchange rates are most appropriate for areas closely integrated through international trade and factor movements.11

Banking With A Single Currency2

Eight impacts are identified and analysed. The first six concern capital markets, including the government bond market and its fast-growing appendix, the interest rate derivative market, the corporate bond and equity markets, institutional fund management, the euromarket, the foreign exchange market, and the competition between the euro and the US dollar as international reserve currencies. The last two effects concern commercial banking with the impact of the single currency on credit risk and on bank profitability in a low-inflation environment. The government bond market in Europe is very fragmented, with domestic players capturing a large market share of the underwriting and secondary trading business. This raises the question of the sources of competitive advantage for local banks. With regard to the underwriting and trading of government bonds, Feldman and Stephenson (1988), a Federal Reserve Bank of New York study (1991) and Fox (1992) show that the dominance of local players...

Currency Crisis

A currency crisis is defined as a situation in which an attack on the currency leads to substantial reserve losses, or to a sharp depreciation of the currency if the speculative attack is ultimately successful or to both. This definition of currency crisis has the advantage of being comprehensive enough to capture not only speculative attacks on fixed exchange rates (e.g., Thailand's experience before 2 July 1997) but also attacks that force a large devaluation beyond the established rules of a crawling-peg regime or an exchange rate band (e.g., Indonesia's widening of the band before its floatation of the rupiah on 14 August 1997.) Since reserve losses also count, the index also captures unsuccessful speculative attacks (e.g., Argentina's reserve losses in the wake of the Mexican 1994 peso crisis.) We constructed an index of currency market turbulence as a weighted average of exchange rate changes and reserve changes.17 Interest rates were excluded, as many emerging markets in our...

Currency F3

The official money currently circulating in a country and available for immediate use as a medium of exchange. It can take the form of coins, banknotes and, in a broader sense, bank deposits. Currencies are called by various names, the most popular being dollar, franc and kroner. The value of a currency is regarded as an overall indicator of world opinion about that country's economy. Apart from the use of prudent fiscal and monetary policies to boost confidence in a currency, there are other ways of making a currency attractive. A central bank can produce beautiful banknotes, offer convertibility into another currency or raise its interest rates to encourage foreign holdings of that currency. A few small countries - Luxemburg, currency appreciation (F3) A rise in the international value of a currency. If, for example, more French francs are exchanged than previously for the same amount of US dollars, the dollar has appreciated. currency basket (F3) A combination of currencies to...

Currency run G2

Currency School (B1, N2) A group of UK economists who, following ricardo, believed that the note issue should be convertible and strictly determined by the amount of gold possessed by the Bank of England. The leaders of the school, Robert torrens and Samuel loyd (later Lord Overstone), convinced Prime Minister Sir Robert Peel of their theory -hence the bank charter act 1844 which was to provide the framework for many of the operations of UK banking until 1980. currency stabilization scheme (F3) An international arrangement by which a group of states agrees to link the exchange rate values of their currencies to gold, a leading currency (e.g. the US dollar) or an artificial currency. The first scheme in the post-1945 period was bretton woods the major one in force at the beginning of the twenty-first century is the european monetary SYSTEM.

The nth currency

Nth currency free as a bird of one money currency in terms of another. In a way (and we have already looked at this in some detail) this price reflects the relative amounts of the two currencies in circulation. To keep this relative amount at a value that leaves the exchange rate unchanged, you do not need two central banks that cooperate and intervene. If two countries fix the exchange rate, one of the two central banks may move its money supply as it pleases, as long as the other one does exactly what is needed to keep the exchange rate at parity. As Figure 12.3 illustrates, this also holds if three countries fix bilateral exchange rates. If, in a Nordic Monetary System, Denmark and Sweden were to set the rate of exchange between Danish krone and Swedish krona to 2, it suffices if Denmark intervenes to maintain that rate. If Norway and Denmark fix their kroner krone rate to 2, then Norway alone can maintain that rate by intervention. But then these two rates implicitly guarantee a...

Currency Crises

The most dramatic form of exchange rate volatility is a currency crisis when an exchange rate depreciates substantially in a short period. Such events push macroeconomics to the top of news summaries and onto the front pages of newspapers. They FIGURE 21.1 Currency crises, 1978-2003. Currency crises are a frequent occurrence. Source Authors' calculations using IMF data. can have huge political and commercial implications. In this section we will examine the frequency of currency crashes and outline theories to explain them. A currency crisis must have two features the exchange rate depreciation must be large relative to recent experience, and the nominal exchange rate depreciation must also affect the real exchange rate. In other words, the depreciation must not just reflect inflation and the operation of PPP. Even when we restrict our attention in this way, we still find that currency crashes are frequent. Figure 21.1 shows that between 1978 and 2003 nearly 250 currency crashes...

Absolute surplus value N5 see surplus value

Absorption approach (F4) A method of analysing a country's balance of payments by comparing its total output with its 'absorption', i.e. its domestic expenditure on goods and services. There will only be an improvement in a country's balance of payments if its total output is greater than its absorption of its own output. By the use of price elasticities and a multiplier, it is possible to examine the effects on output and absorption of the devaluation of a currency.

Structure and content

In each chapter there are three or four case studies, with questions attached. These are inserted into the text as close as possible to their points of relevance. Many chapters also include solved problems sometimes these are embodied in the text as examples to illustrate the concepts involved, and in other cases they are included at the end of the chapter, according to whatever seems more appropriate. There are also review questions and in many cases additional problems at the end of the chapters, following the chapter summaries. The currency units involved in these problems vary, being mainly in pounds sterling and US dollars this is in keeping with the international nature of the material in both the text and the case studies.

Understanding Economic Policy Issues Better

In Chapter 8 we will discuss free trade and the battle between Airbus of Europe and Boeing of the United States. For each firm, success in the marketplace requires understanding not just the products and strategy of the opposition but also the policy stance of European and American governments as well as the attitude of international organizations like the World Trade Organization. Understanding the interests and behavior of the government and its policies is therefore an important part of corporate strategy, and this requires a good understanding of macroeconomics. Any firm considering investing in Argentina would need to consider the potential for another currency crisis which is a macroeconomic question.

Electronic Commerce of Digital Products

Development of digital currency, many aspects of payment clearing procedures will also change significantly, particularly in terms of per-transaction cost and speed. Such changes in marketing, payment, and customer service will affect the markets for both physical and digital products for example an online

Changes in the discussion of international finance and open economy macroeconomics

In Chapter 14 the discussion of foreign exchange options, which some readers found to be confusing, has been rewritten and extended, with an emphasis on intrinsic and time values in determining premiums on foreign exchanged puts and calls. In Chapter 16, the treatment of currency boards has been extended, with an emphasis on why Argentina's institution failed. Dollarization is also covered more thoroughly. Chapter 17 now includes far more on the disastrous effects of currency mismatches when a country devalues. If banks and other firms in a country have large liabilities denominated in foreign exchange without offsetting foreign exchange assets of other forms of cover, a devaluation can produce a wave of insolvencies and create something approaching a depression, as Argentina discovered very unhappily. The diagram developed by Trevor Swann to analyze a devaluation has been added at the end of this chapter, with the accompanying discussion emphasizing how both the exchange rate and...

Exchange Rate Management

A government's decision about exchange rate management is the most important factor shaping currency markets. There are four basic categories fixed, semifixed, floating, and fixed rate. Gold standard. The oldest is the gold standard, which was introduced by the United Kingdom in 1840 and adopted by most other countries by 1870. A country's money is directly linked to the gold reserves owned by the central bank. Gold can be exchanged at any time for notes and coins. The system was thought to be self-correcting. For example, if a country ran a trade deficit, the central bank could not eliminate the deficit via currency devaluation (which would make exports cheaper and imports more expensive). Rather, as foreigners exchanged their excess currency for gold, money in circulation would drop because there was less gold. The country would be forced into recession, which would reduce demand for imports. Pegged exchange rate. This occurs when a country decides to hold the value of its currency...

Attempts To Rationalize Ideas About

It was in this article that he formally renounced the wage-fund theory and gave currency to the view that there was some way in which trade unions could gain, not at the expense of other workers but at the expense of the capitalist. An attempt to analyze separately and carefully every single theory put forward by all these writers has led to the conclusion that they consist largely in the rationalization of ideas about labor's disadvantage in bargaining which, far from being novel, had been held continuously since the time of Adam Smith. For the rest they seem at first to contain little beyond a number of attacks on the general theory of prices based on generalizations induced from the consideration of a number of hypothetical and improbable special cases, and a number of newly coined descriptive phrases which have since served as a substitute for thought in these matters.

An Overview of Central Banks

They are a banker's bank, a place where banks can seek relief in turbulent times. They usually are issuers and custodians of the currency, and protect it from everything including forgery to runs on its value. Many have regulatory powers as well. And most importantly, they make monetary policy decisions.

Miscellaneous Theories of Multinational Banking

Exchange rate movements can increase or decrease the financial resources required by potential MNBs to enter foreign markets. For example, a depreciation of the currency of the target bank's country relative to that of the acquiring bank's country may make a previously unaffordable takeover feasible, and conversely for a relative appreciation. However, such exchange rate movements have the opposite impact upon the income generated from foreign sources when measured in the domestic currency of the MNB. So the impact of exchange rates upon the incidence of multinational banking is ambiguous. For this reason, and perhaps also because of the complexity of constructing an exchange rate proxy which accurately captures the continuous fluctuations in exchange rates, the modest number of empirical tests in this area provide little guidance or enlightenment (for example, Goldberg and Johnson, 1990).

Beggarthyneighbor policies

The great depression of the 1930s had most industrial countries in its grip, and individual nations were unable to resist the temptation to devalue their currencies. Given the exchange rates of other countries, if one country devalued its currency then its goods would be cheaper to the rest of the world and its own citizens would import less as other countries' goods rose in price in terms of the domestic currency. The result is a stimulus to the devaluing country's industries at the expense of other countries. (It was thus called a beggar-thy-neighbor policy.) But the same temptation confronts each nation. Devaluation is a dominant strategy. Each country attempts to lower the price of its currency relative to others and adopts additional measures to restrict imports. As all countries restrict imports all countries' exports dwindle and the worldwide depression deepens.

Conceptual Questions

(2.5) Do you think it is easier to evaluate the relative welfare of different generations of people in one country (by comparing per capita GDP over time), or to compare the relative standards of living in different countries at a point in time (by converting current per capita GDPs into a common currency)

Types of Multinational Organizational Form

Correspondent banking does not in fact constitute multinational banking as defined in Section 1 because it involves no direct foreign investment, or any physical presence in the foreign market. The description of this type of banking is provided merely to contrast with the later discussion of multinational banking. It consists of a correspondent relationship, typically on a reciprocal basis, between domestic banks in different countries. The relationship involves the foreign domestic bank (the correspondent) conducting financial transactions and related activities in the foreign market on behalf of the home bank. Common services include extending foreign currency credit, issuing or honouring letters of credit and providing information about foreign market conditions. The foreign correspondent performs the transactions on behalf of the home bank in return for a fee.

International trade and trade policy

The patterns of international trade and investment cited in Chapter 1 sometimes vary considerably from year to year, but they also demonstrate general trends over time. Factors that determine the volatility in the short run often differ from factors that determine the long-run trends. In the first half of this book, we pay primary attention to the longer-run determinants of these trends in international trade and investment. Economists often refer to these relationships as pertaining to the real side of the economy. The goods a country trades typically are independent of whether the country fixes the value of its national currency in terms of gold, or euros, or the dollar. Likewise, a country's choice of monetary policy is not likely to have a permanent impact on whether it exports airplanes and imports shoes. Although such financial relationships are a significant part of our discussion of international finance in the second half of this book, we largely ignore them in our treatment...

Bed and breakfast G1 L8

Mercantilist thinking and was later practised in the 1930s by many countries. First predominantly agricultural economies adopted it later it was adopted by the UK, USA, France, the Netherlands and Switzerland. After 1945, currency devaluations have embodied this principle. A policy of this type has always been criticized because of its self-defeating character domestic industries can ignore foreign competition so become more inefficient and export industries facing retaliation have a reduced output and consequentially higher unit costs which make them even more uncompetitive in world markets.

The trouble with economists and policies

The implementation of a policy of growth requires institutions suited to the choice of the main economic measures. The economic experience of the eurozone in the first five or more years of the existence of the euro has raised serious questions about the appropriateness of the institutional and policy arrangements governing the European single currency and their ability to deal with unemployment and recession (as well as inflation). This is the central issue addressed in Chapter 10 by Philip Arestis and Malcolm Sawyer, who argue that those arrangements must be changed. The institutional arrangements are embedded in the Stability and Growth Pact (SGP) and in the monetary policy operated by the European Central Bank (ECB). The authors begin by briefly locating the key theoretical features and policy implications of the system of European Monetary Union (EMU). Then they proceed with the discussion of the SGP and ECB arrangements and describe how they have been operated since their...

Bohm Bawerk Eugen von 18511914

Leading economist of the austrian school and disciple of Carl menger. He read law at Vienna University and then economics at Heidelberg, Leipzig and Jena Universities his student contemporary was wieser. From 1889 to 1893 he was a civil servant working on income tax and currency reform. On three occasions (1893, 1896-7 and 1900-4) he was the Minister of Finance of Austria in 1902 University of Vienna appointed him to a chair. In his economic writings, he began with a theory of value based on marginal utility and then proceeded to a theory of interest and capital. His lengthy exposition of the

Financial Market Instruments

Treasury bills are the most liquid of all the money market instruments, because they are the most actively traded. They are also the safest of all money market instruments, because there is almost no possibility of default, a situation in which the party issuing the debt instrument (the federal government, in this case) is unable to make interest payments or pay off the amount owed when the instrument matures. The federal government is always able to meet its debt obligations, because it can raise taxes or issue currency (paper money or coins) to pay off its debts. Treasury bills are held mainly by banks, although small amounts are held by households, corporations, and other financial intermediaries.

The Actual Practice of Inflation Targeting

The Bank of Canada probably has the vaguest legal mandate. Its statute requires it to regulate credit and currency in the best interests of the economic life of the nation.'' Despite the absence of a precise legal mandate, the details of the Bank's monetary policy objectives are reached by agreement between the Bank and the Department of Finance. The current agreement, which is renewed every five years, sets price stability as monetary policy's principal objective and sets the range for inflation as 1 percent to 3 percent, with the midpoint as the explicit target. The Reserve Bank of Australia has a mandate most closely resembling the United States, but it is even broader and more open-ended. And although the country is considered an inflation-targeting country, it has a dual mandate rather than a hierarchical one. Their legislative mandate as stated in the Reserve Bank Act is ''to promote stability of the currency of Australia maintain full employment in Australia and foster economic...

Reconstructing A Global Economy

Much work between the end of World War II in 1945 and the end of the Soviet Union in 1991 went into reconstructing a new global economic system. The immediate struggle was physical reconstruction to repair or rebuild the roads, bridges, power stations, and ports that underpinned national economic production and international trade. Yet the plumbing of the international economy also needed to be reconstructed, with currency arrangements and rules for international trade that would permit the market-based flow of goods and services, and the productivity gains that would emerge from a renewed global division of labor. This reconstruction effort took place in three steps. First, the countries already industrialized as of 1945 Europe, the United States, Japan reconstructed a new international trading system under U.S. political leadership. Step by step, these countries reestablished currency convertibility (in which businesses and individuals could buy and sell foreign exchange at market...

Keynes and the General Theory

John Maynard Keynes (1883-1946) was already a celebrity by the time the General Theory came out. When he was a young man, his book The Economic Consequences of the Peace (1919), prophetically predicting a breakdown in the reparations agreement between the Axis Powers and Germany following World War I, catapulted him into the limelight. While a lecturer at Cambridge University, he also worked as a journalist, made a fortune speculating in currency markets, consulted with the Department of Treasury, helped Cambridge out of its financial difficulties while serving as bursar, was editor of the Economic Journal, was a patron of the arts, and wrote books about probability theory and the economics of money (Skidelsky, 1992).

Group of Five Then Seven

To further international cooperation, the finance ministers and central bank chairs of the major industrial countries meet periodically to discuss common economic and financial issues. The Group of Five, originally consisting of the United States, Japan, the United Kingdom, Germany, and France, met for the first time in 1975, and in 1976 were joined by Canada and Italy. The meetings expanded to include heads of state on an annual basis usually in June or July. The finance ministers and central bank chairs generally meet quarterly. Financial markets usually pay close attention to the statements that emanate from these meetings. For example, the April 2006 meeting statement saying that Asian countries should allow their currencies to rise in value was interpreted by currency traders to mean that the U.S. dollar should decline, much to the consternation of Asian governments, who prefer a lower currency value to promote their exports.

Evolution of the Payments System

We can obtain a better picture of the functions of money and the forms it has taken over time by looking at the evolution of the payments system, the method of conducting transactions in the economy. The payments system has been evolving over centuries, and with it the form of money. At one point, precious metals such as gold were used as the principal means of payment and were the main form of money. Later, paper assets such as checks and currency began to be used in the payments system and viewed as money. Where the payments system is heading has an important bearing on how money will be defined in the future. The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Initially, paper currency carried a guarantee that it was convertible into coins or into a quantity of precious metal. However, currency has evolved into fiat money, paper currency decreed by governments as legal tender (meaning that legally it must be...

Birth of the Euro Will It Benefit Europe

As part of the December 1991 Maastricht Treaty on European Union, the European Economic Commission outlined a plan to achieve the creation of a single European currency starting in 1999. Despite concerns, the new common currency the euro came into existence right on schedule in January 1999, with 11 of the 15 European Union countries participating in the monetary union Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, the Netherlands, Portugal, and Spain. Denmark, Sweden, and the United Kingdom chose not to participate initially, and Greece failed to meet the economic criteria specified by the Maastricht Treaty (such as having a budget deficit less than 3 of GDP and total government debt less than 60 of GDP) but was able to join later. Advocates of monetary union point out the advantages that the single currency has in eliminating the transaction costs incurred in exchanging one currency for another. In addition, the use of a single currency may promote further...

Monetary Standards Fiat Versus Commodity Money

In the preceding section it was mentioned that the basic medium of exchange in the United States consists of U.S. coins and paper Federal Reserve notes. It should be emphasized that these items of currency do not constitute claims on gold or any other precious metal, or indeed on any commodity U.S. currency is simply fiat money, money by arbitrary order or decree. 5 This point deserves emphasis because it calls attention to the important distinction between fiat-money and commodity-money systems.

Are We Headed for a Cashless Society

The narrowest measure of money that the Fed reports is M1, which includes currency, checking account deposits, and travelers checks. These assets are clearly money, because they can be used directly as a medium of exchange. Until the mid-1970s, only commercial banks were permitted to establish checking accounts, and they were not allowed to pay interest on them. With the financial innovation that has occurred (discussed more extensively in Chapter 9), regulations have changed so that other types of banks, such as savings and loan associations, mutual savings banks, and credit unions, can also offer checking accounts. In addition, banking institutions can offer other checkable deposits, such as NOW (negotiated order of withdrawal) accounts and ATS (automatic transfer from savings) accounts, that do pay interest on their balances. Table 1 lists the assets included in the measures of the monetary aggregates both demand deposits (checking accounts that pay no interest) and these other...

Archeology In The Field Of Economics

In the seventeenth and eighteenth centuries, this art of infinite translation was replaced as a ruling principle by the new technique of analysing each complex phenomenon according to its primary elements. Just as the numerous classification systems of 'natural history' sought to reduce the vast diversity of the animal, vegetable and mineral kingdoms to combinations of a few elementary qualities, the classical 'analysis of riches' endeavoured to resolve the exchangable values of all commodities into their elementary arithmetic components. This procedure presupposed the representation of all values by some universal standard (such as money) - meaning not only an intellectual process, but the real act of exchange. Thus represented, things turned into values, and at the same time ceased to be riches in the genuine sense of a physical surplus disposable to satisfy the want of some other person, or, so to speak, the 'surplus' of this other person's mental representation over what is...

Putting the Signals Approach to Work

The signals approach described above was first used to analyze the performance of macroeconomic and financial indicators around ''twin crises'' (i.e., the joint occurrences of currency and banking crises) in Kamin-sky and Reinhart (1999). We focus on a sample of 25 countries over 1970 to 1995. The out-of-sample performance of the signals approach will be assessed using data for January 1996 through December 1997. These are the countries in our sample

How The Bank Determines Monetary Policy

The financial markets are poised to pounce on the news. Each financial market will react differently. For example, while the foreign exchange market might look on an increase in the interest rate with favor, equity markets might see things differently. Equity investors would be concerned that higher rates would cut into sales and profits while currency traders would see assets earning a better return.

The birth of economic thought in Italy Antonio Serra79

The second part of the Breve trattato was the longest of the three, and the least clear in exposition. Half of it (the first five chapters) was dedicated to confutation of De Santis' thesis that 'the high rate of exchange in Naples compared with other places in Italy is the only cause that made the Kingdom poor in money', since it caused letters of exchange to be used for payments from outside the Kingdom, while money was used for payments to outside the Kingdom.82 Serra denied that the asymmetry could derive from the mechanism of the letters of exchange the paucity of money in the Kingdom depended on the underlying imbalance in what we would now call the balance of payments. As a matter of fact, if we translate into our terminology what Serra maintained in his chapter 10, the influx of currency corresponding to exports of agricultural products was much more than offset by outflows for interest remittances on public debt and profit remittances on productive activities under the...

Chamberlin Edward Hastings 18991967 B3

Chancellor of the Exchequer (H1) UK finance minister who is the ministerial head of the Treasury. The Chancellor is responsible for proposing changes in public expenditure and taxation, the conduct of monetary policy nationally (apart from the independent setting of interest rates) and internationally and all currency matters

Change in demand or supply D0

Chaos theory (D0, G1) An analysis of random movements applied to the price data of stock and currency markets, as well as to meteorology. Chaotic behaviour appears random in that changes in prices or other economic variables show no regular periodicity and are not part of a structure detectable by statistical tests. However, more sophisticated tests offer a chance of identifying underlying non-linear mathematical structures.

Brief History Of Hedge Funds

Financial assets foreign currencies, bonds (both in the United States and abroad), and stock market indices (both in the United States and abroad). During the 1980s and 1990s, the equity hedge fund community and the futures trading community began to merge along the edges. Hedge fund managers who had begun their careers focused mainly on U.S. equities became more active in non-U.S. equities, U.S. and non-U.S. bonds, foreign exchange, and sometimes even physical commodities. At the same time, CTAs who had begun their careers focused mainly on physical commodities became more active in financial futures, and ultimately became active in the stock, bond, and currency markets directly, without relying on futures contracts. So, on the one hand, funds managed by people like Michael Steinhardt and Julian Robertson evolved from being pure equity hedge funds into being global asset allocators, for which managers survey the entire universe of stocks, bonds, currencies, and physical commodities....

The exchange rate and the balance of payments

A market brings together potential buyers and sellers of a specific good. And a functioning market generates a price that balances supply and demand, thus clearing the market. The commodity traded in the foreign exchange market is foreign currency, or rather, foreign currencies. There are, in fact, dozens of currencies traded around the clock in the world's currency markets, and each pair of currencies has its market. One that trades euros against yen, one that trades pounds sterling against dollars, one that trades dollars against euros, and so on. We will sidestep the complications arising from this by lumping all foreign currencies - dollars, roubles, shekels, yen and so forth - under the heading foreign exchange. Foreign exchange is, then, simply all currencies other than the domestic currency. Now when we start thinking about why individuals may want to purchase or sell foreign currency, we need not start from scratch. Luckily, countries began many years ago to record all their...

Balance of payments basics

Any transaction that requires a purchase of domestic currency is a credit (positive) item in that country's balance of payments. Any transaction that requires a sale of domestic currency is a debit (negative) item. Since domestic currency can only be purchased if someone else is prepared to sell, the sum of all credit items (of all purchases of domestic currency) must equal the sum of all debit items (sales). This means that the demand for domestic currency always equals the supply of domestic currency, and that the foreign exchange market always clears. This is why the conditions that equalize the balance of payments also equalize the foreign exchange market.

Commodity Futures Trading Commission G2 H1

Commodity reserve currency (F3) A currency with a value based on a 'basket' of commodities representative of average consumption. This currency tends to be stable over time, as happened under the gold standard, and can take a variety of forms reflecting the technical characteristics of commodities at a particular time and the desired level of stability. However, it has been argued that few commodities are suitable for inclusion in the 'basket', e.g. on account of storage difficulties, but using commodity futures could eliminate many of these problems.

Current Overview and Problems

In recent times there have been additional factors, such as the euro. According to Metcalfe (1999), with the disappearance of currency pairs and consequently fewer trading opportunities, the focus has shifted to credit as an alternative trading opportunity. Further, with the single currency, business and even banks will consolidate and restructure to tackle changes in Europe. Corporate restructuring usually signals increased corporate debt, in the process expanding the credit market, and allowing the use of credit-derivative products to flourish. Financial institutions domiciled within the single industry area will be competing for capital not just domestically, but with other financial institutions throughout the single currency area. This activity will, however, be of concern to regulators, who are usually wary of a surge in such innovative products, along with their impact on capital adequacy and the stability of the financial system overall.

Singular EU Achievement The Euro

The euro replaced the old national currencies in the 12 countries that chose to join the eurozone or European Monetary Union Austria (schilling), Belgium Luxembourg (franc), Finland (markka), France (franc), Germany (deutschemark), Greece (drachma), Ireland (pound), Italy (lira), the Netherlands (guilder), Portugal (escudo), and Spain (peseta). The advantages to the single currency include easier travel, easier price comparisons with all goods and services priced in euros, and a stable environment for European business, which stimulates growth and competitiveness. These goals have proven illusive, however. Now if you are an EU citizen, you can travel, study, and work wherever you want in all EU countries. In most of the EU, you can travel without carrying a passport and without being stopped for border checks. By creating a frontier-free single market and a single currency, the EU has already given a significant boost to trade and employment in Europe. It has agreed on a strategy for...

Economic ethics of ancient Israel

Some of the most important standards applied to the production of goods, money and debt. Tamari states that it was forbidden to produce or sell goods or services that were harmful to their consumers, either physically or morally. Moreover, each individual was responsible for damages caused by one's body or property. Theft or economic dishonesty in any form was forbidden. Each person was required to limit one's appetite for material goods. One's disposable income was automatically reduced by interest-free loans, demands of taxation to finance welfare, education and the physical well-being of the community. Most importantly, it was forbidden to take interest either as a direct payment for loans or in the course of business activities. Interest-free loans were regarded as acts of righteousness and the highest form of charity. These loans allowed the poor to break out of the poverty cycle and prevented the rich from entering it. Loans were repaid according to their nominal value without...

Different Rules for the 10 New Members

Only the United Kingdom, Sweden, and Denmark of the original group were able to retain their national currency when they did not to join EMU. But unlike the original EU 15, the new members do not have a choice and cannot opt out of adopting the euro as their currency. The new countries, in order to join the EMU, must fulfill strict Maastricht criteria on inflation, budget deficits, and public debt. Several new members have already breached the mandated budget deficit ceiling of 3 percent of GDP as stipulated by the Growth and Stability Pact but then many of the original members are currently above the mandated percentage as well. One-size monetary policy does not necessarily fit all. The European Commission and the ECB have warned that hasty EMU entry could endanger the new members' growth prospects by depriving them of the monetary flexibility needed to cope with the pressures of the single market. Even some rich West European countries have been harmed by the single currency, with...

The algebra of the FE curve

The discussion of the foreign exchange market equilibrium line may well be one instance where a little algebra says more than six graphs. The foreign exchange market is in equilibrium when the supply of and the demand for currency balance without central bank intervention, that is when

Foreign Exchange Market

Market in which the money (currency) of one nation can be used to purchase (can be exchanged for) the money of another nation. exchange rate The rate at which the currency of one nation is exchanged for the currency of another nation. Buyers and sellers, whether individuals, firms, or nations, use money to buy products or to pay for the use of resources. Within the economy, prices are stated in the domestic currency and buyers use that currency to purchase domestic products. In Mexico, for example, buyers possess pesos, exactly the currency that sellers want. International markets are different. How many dollars does it take to buy a truck-load of Mexican corn selling for 000 pesos, a German automobile selling for 90,000 euros, or a Japanese motorcycle priced at 00,000 yen Producers in Mexico, Germany, and Japan want payment in pesos, euros, and yen, respectively, so they can pay their wages, rent, interest, dividends, and taxes. A foreign exchange market, a market in which various...

Argentinas Break with the Past

Stepped down, and the civilian government of Raul Alfonsin took power with the promise of economic revitalization. But the Latin American debt crisis struck Argentina as hard as the rest of the region, and Alfonsin's attempt to stabilize prices by introducing a new currency, the austral, failed dismally. By 1989 the nation was suffering from true hyperinflation, with prices rising at an annual rate of 3,000 percent. But the distinctive Cavallo touch was the monetary reform. In order to put a definitive end to the country's history of inflation, he resurrected a monetary system that had almost been forgotten in the modern world a currency board. Currency boards used to be standard in European colonial pos sessions. Such possessions would ordinarily be allowed to issue their own currency but the currency would be rigidly tied in value to that of the mother country, and its soundness would be guaranteed by a law requiring that the domestic currency issue be fully backed by hard-currency...

Simulated Mogul Games

Our mogul game simulations consisted of twenty players, a hundred units of currency (100 U.S. dollars), a territory consisting of four-hundred (400) cells and a set of rules by which each player could acquire currency. Players began the game with no currency. Each simulation ended when all currencies had been collected. The initial distribution of dollar bills within the territory was random, uniform or clustered. At the beginning of each game, players were placed randomly within the territory. Thereafter, players traveled within the territory according to the rules in the next section. When a player landed in a cell containing a dollar bill, he collected it and carried it with him.

The health of health economics

The impact of health economics outside the economics profession has been immense. It has introduced the common currency of economists (opportunity cost, elasticity, the margin, production functions) into medical parlance (indeed, established health economists are as likely to be as heavily cited in the scientific literatures as in economics). Some major areas of research are essentially multi-disciplinary (cost-effectiveness studies and determinants of population health are two ready examples) and have led to fully integrated teams of researchers with health economists at their heart. Its policy impact has also been immense see, e.g., Hurst (1998) . As has been the case with other health-related professions, the language of health economics has permeated the thinking of policy makers and health service managers at all levels. Alongside academic health economics, and often in close association with it, has grown an immense cadre of health economics consultancies, servicing the demands...

Contracyclical policy E3 see countercyclical policy

Convergence criteria (F3) The five macroeconomic rules set out in the Treaty of Maastricht for member countries of the European Union to enter the single currency, the euro the public deficit to be no more than 3 per cent of GDp average inflation rate over 1997 not to exceed 1.5 per cent of the three best-performing member states gross government debt to be less than 60 per cent of GDp the national currency to fluctuate within the margins set by the Exchange Rate Mechanism for at least two years, avoiding devaluation and severe tensions

The Origin Of Emu A Reminder

Its conclusions were incorporated in the February 1992 Maastricht Treaty on European Union. Stage I, from 1 July 1990 to 31 December 1993, provided for the freedom of capital flows and the coordination of national monetary policies. Stage II started in July 1994 with the creation of the European Monetary Institute. One of its missions was to prepare the monetary institutions and the European System of Central Banks (ESCB). Finally, Stage III of European Monetary Union (EMU) started on 1 January 1999. The exchange rates between the 11 member countries were irrevocably fixed. The interbank and capital markets operated exclusively in euros, while the retail market continued to use domestic currency until the first two months of 2002, in which euro banknotes and coins replaced national currencies. The potential economic benefits and costs of EMU were discussed in a European Commission study, 'One market, one money' (Emerson, 1990). The report cited four major benefits arising from...

Why a Stability Pact Was Necessary

At issue was how to maintain the stability of a single currency when the countries that use it make their own economic policy. Germany, which in the 1980s had a thriving economy and a sound budget, did not want to be dragged down by chronic debtors like Italy. If one wants a common currency, fiscal policies must harmonize somehow. The countries finally agreed at Maastricht to set out strict requirements that members had to meet before they could be admitted to the euro club.

Forced Labor in Soviet Industry

The monetary reform of December 14,1947, returned the economy to a more normal postwar footing. The old currency was exchanged for a new currency at the rate of ten to one, and only limited sums could be converted, thereby liquidating savings, such as those of a worker who had saved one thousand rubles to buy a coat.20 Prices of rationed goods were raised close to those in commercial stores fewer and fewer products were rationed, and the stimulus to work returned. According to one worker Under

Hegemony Growth Distribution and Value

A great portion of what acted as the circulating medium of exchange throughout the country becomes valueless and the effects are precisely the same as if an equal portion of the metallic currency of the country had been suddenly annihilated or exported. Prices fall, the importation of commodities is checked, and their exportation is encouraged. The foreign exchanges become universally favourable, and the precious metals flow in until the void, occasioned by the destruction of the paper currency, has been filled. (Senior, 1998a 1828 , p. 27)

Flexible exchange rates

Under a system of flexible exchange rates the central bank simply ignores the excess demand for domestic currency and leaves things up to the market. So the currency price must change in order to match supply and demand. If financial investors cannot obtain domestic currency at the current price, which is the reciprocal value of the exchange rate, they offer more. This drives up the price per unit of domestic currency, and it drives the exchange rate down. The domestic currency appreciates. As we know, this has repercussions in the goods market. Domestic goods become more expensive relative to foreign goods and net exports fall. The IS curve shifts to the left. During this process C gradually slides down the LM curve towards A. This slide cannot come to a halt before A has been reached. Otherwise the domestic interest rate would still exceed the world interest rate, causing the excess demand for domestic currency to continue. Only as IS returns to its original position and the economy...

Who Manages Hedge Funds

Fourth, and finally, there are money managers who are part of large financial firms that offer multiple financial services investment management, brokerage, investment banking, lending, and so forth. Sometimes these financial powerhouses offer specific hedge fund strategies risk arbitrage, market-neutral European equities, currency trading, and so forth. Sometimes these powerhouses offer fund-of-funds strategies, in which the firm builds a diversified portfolio of hedge fund investments, some of which are managed by in-house managers (that is, managers affiliated with the firm offering the fund of funds) and some of which are run by external managers. When the financial powerhouses offer hedge fund products to their clients, the products may be based within the asset management division, the brokerage division, the private banking area, or elsewhere in the bank. We shall return to some of these complexities in the next chapter.

Statistical economic research

Observing that individuals hold cash balances as part of their daily routine, Mises ( 1924 1953 139-140) offered a subjectivist account of how private efforts to adjust cash balances at a time when nominal balances are increasing throughout the relevant currency area lead to price rises. On the basis of this analysis, Mises agreed with the older currency school group that insisted that the cause of a sustained rise in prices was an overly rapid growth of the money supply (ibid. 219-231). Mises assumed that most responsible political leaders found inflation to be quite unacceptable. Using a broader definition of the money supply that included bank deposits subject to check, Mises evaluated the large variety of institutional reforms to identify those that would make it difficult for the money supply to rise and inflation to follow.3

Foreign exchange market efficiency

If the risk-neutral efficient markets hypothesis holds, then the expected foreign exchange gain from holding one currency rather than another - the expected exchange rate change -must be just offset by the opportunity cost of holding funds in this currency rather than the other - the interest rate differential. This condition, generally referred to as the uncovered interest rate parity (UIP) condition, represents the cornerstone parity condition for testing foreign exchange market efficiency where st denotes the logarithm1 of the spot exchange rate (domestic price of foreign currency) at time t, it and it are the nominal interest rates available on similar domestic and foreign securities respectively (with k periods to maturity), Akst+k st+k - st, and the superscript e denotes the market expectation based on information at time t. Most often, however, discussions of foreign exchange market efficiency have taken place in the context of the relationship between spot and forward exchange...

Exchange rate overshooting

Consider next a money-supply increase under flexible exchange rates. The argument is very similar to the previous one (see Figure 5.12). The money-supply increase shifts LM to the right. As this tends to push the interest rate down, the home currency depreciates. This stimulates net exports, shifting the IS curve to the right. At point B output exceeds full capacity output Y* and prices begin to rise. Rising prices reduce the real money supply, shifting LM to the left. Rising prices also make domestic goods more expensive compared with foreign goods. The real exchange rate falls (appreciates), which reduces net exports and shifts IS to the left. This process continues until both the money market and the goods market equilibrium curves are back in their original positions and the economy is at point A again. That means that the

Working with graphs part II

Denotes the exchange rate EPPP that equates prices abroad and at home in domestic currency The exchange rate affects our exports with a positive coefficient. If our currency depreciates against other currencies, other currencies appreciate against our currency. This makes our exports cheaper for foreigners and they will want to buy more of them.

Deposit refund schemes

Depreciation The reduction in the value of capital equipment as a result of its use or of the passage of time since its construction. At the macroeconomic level it refers to the sum of depreciation across all types of human-made capital, which is deducted from gross domestic product (GDP) to yield the net domestic product (NDP). The term may also refer to a fall in the value of a nation's currency.

Key terms and concepts

5.4 How does a devaluation of the domestic currency in a system with fixed exchange rates and perfect capital mobility affect the domestic interest rate and output 5.6 Suppose that investors suddenly lose confidence in the domestic currency and expect it to depreciate. Trace the consequences in the Mundell-Fleming model. What does the result tell you about 'self-fulfilling prophecies' Will the induced changes in income and the (flexible) exchange rate last

Financial Instruments and Markets

Savings can be held in financial assets other than money. Since currency and checking accounts offer savers little or no interest, many savers are willing to transfer money balances they do not intend to spend for a period of time into a higher-yielding financial instrument. A credit or debt financial instrument is one which requires that a borrower make periodic interest payments and repay the amount loaned at the end of a contract period. An equity financial instrument gives the saver partial ownership of a firm and a share of its profits.

Divergence indicator F3

The margin by which a currency in the exchange rate mechanism can diverge from its central or par value. This is 2.25 per divergence threshold (F3) The crucial value of the divergence indicator for a currency of the exchange rate mechanism. At this value, either a change in the domestic economic policies of the country concerned or a change in the par value of its currency is required.

The Italian Enlightenment the Abb Galiani

Bernardo Davanzati, in the second half of the sixteenth century, while stressing, however, the latter's inability to solve what was to be known as the 'paradox of water and diamonds', that is, the high value of goods to which normally low utility is attributed, and on the contrary the low value of goods that are considered as not just useful, but necessary. In fact Davanzati was concerned with monetary and currency problems, and only en passant with the themes under discussion here all Galiani (1751, p. 44) could quote with approval was the following passage 'The rat is a most disgusting animal but in the siege of Casilino everything was so dear that two hundred florins were paid for a rat and it was not dear, since the person who sold it died of hunger, while the person who bought it survived.'

Analysis of Attempts at Stabilization

A distinction should be made between two such systems. The older system is that of the tabular standard and makes the adjustments only in the case of deferred payments that is to say, it merely alters the nominal amount of the debt contract without touching the monetary system at all. The second system, represented by Irving Fisher's stabilized dollar and J. M. Keynes' manipulated currency, involves an adjustment of the purchasing power of the money in circulation as a whole. Here, again, there is to be no adjustment until after the change in purchasing power has taken place and after its unequal and irregular incidence has had its effect. Such ex post facto adjustments do nothing either to eliminate or to mitigate the effects of the second category it can only apply to the effects of the first category. That is the essential point that needs to be made. If this is borne in mind, it will be realized that radical though these proposals sound, they would by no means be so drastic in...

The Bank Reflects Its Geography

Canada was not interested in establishing a central bank during its first 50 years of Confederation. And even up to the 1930s' depression, there was little need for one in a country whose population was scattered and mainly rural. As banks were established in the early 1800s, they issued their own notes, as did various governments and even merchants. In central Canada, the efforts of the growing financial community to solve the problem of currency were complicated by a loss of hard currency (gold and silver coins) to the United States with an increase in cross-border trade. As a result, sentiment in favor of a national currency increased. Following Confederation in 1867, Parliament confirmed its control of currency with legislation and began to issue Dominion of Canada notes. Notes issued by both the government and the chartered banks were in common use for many years, until (and for a transitional period after) the Bank of Canada was created in 1934 and given sole responsibility for...

The modern definition of money

Walker also prefers that the term money be applied to coins and paper money, rather than currency, as was the practice during the classical period. He argues, I see no valid objection to the scientific acceptance of the popular term, Paper Money. The presence of the word paper so far qualifies and explains the word money, as to show that a material recompense or equivalent is not meant. No one is likely to be misled by the use of the term nor am I confident that this use of the term does not conform to the highest conception of the Money-function. Certainly, the word Currency has proved a most disastrous substitute, inducing infinite confusion and contradiction. A bank-note, so long as its currency remains, serves as the medium of exchange it serves as the standard for deferred payments, precisely as the piece of gold which it replaces in circulation and if anything serves as a common measure of value, it is the paper that does so, and not the thing promised by the paper. For these...

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