M19KRUG89289EIMC19.docx

M19KRUG89289EIMC19.docx

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M19KRUG89289EIMC19

OverviewofSectionIV:

InternationalMacroeconomicPolicy

SectionIVofthetextconsistsoffourchapters:

Chapter19  InternationalMonetarySystems:

AnHistoricalOverview

Chapter20  OptimumCurrencyAreasandtheEuropeanExperience

Chapter21  FinancialGlobalization:

OpportunityandCrisis

Chapter22  DevelopingCountries:

Growth,Crisis,andReform

1 SectionIVOverview

Thisfinalsectionofthebook,whichdiscussesinternationalmacroeconomicpolicy,provideshistoricalandinstitutionalbackgroundtocomplementthetheoreticalpresentationoftheprevioussection.ThesechaptersalsoprovideanopportunityforstudentstohonetheiranalyticskillsandintuitionbyapplyingandextendingthemodelslearnedinSectionIIItoarangeofcurrentandhistoricalissues.

Thefirsttwochaptersofthissectiondiscussvariousinternationalmonetaryarrangements.Thesechaptersdescribetheworkingsofdifferentexchangeratesystemsthroughthecentralthemeofinternalandexternalbalance.Themodeldevelopedintheprevioussectionprovidesageneralframeworkforanalysisofgoldstandard,reservecurrency,managedfloating,andfloatingexchange-ratesystems.

Chapter19chroniclestheevolutionoftheinternationalmonetarysystemfromthegoldstandardof

1870–1914,throughtheinterwaryears,anduptoandincludingthepostwarBrettonWoodsperiod.Thesehistoricalepisodesareputintothecontextoftheinternationaleconomicstrilemma,theobservationthatyoucansimultaneouslyachievetwo,butneverthreeofthefollowingpolicygoals:

exchangeratestability,independentmonetarypolicy,andopencapitalmarkets.

Thechapterdiscussestheprice-specie-flowmechanismofadjustmentinthecontextofthediscussion

ofthegoldstandard.Conditionsforinternalandexternalbalancearepresentedthroughdiagrammaticanalysisbasedupontheshort-runmacroeconomicmodelofChapter17.Thisanalysisillustratesthestrengthsandweaknessesofalternativefixedexchangeratearrangements.Thechapteralsodrawsuponearlierdiscussionsofbalanceofpaymentscrisestomakecleartheinterplaybetween“fundamentaldisequilibrium”andspeculativeattacks.ThereisadetailedanalysisoftheBrettonWoodssystemthatincludesacasestudyoftheexperienceduringitsdeclinebeginninginthemid-1960sandculminating

withitscollapsein1973.

Europe’sswitchtoasinglecurrency,theeuro,isthesubjectofChapter20,andprovidesaparticularexampleofasinglecurrencysystem.ThechapterdiscussesthehistoryoftheEuropeanMonetarySystemanditsprecursors.TheearlyyearsoftheE.M.S.weremarkedbycapitalcontrolsandfrequentrealignments.

Bytheendofthe1980s,however,therewasmarkedinflationconvergenceamongE.M.S.members,

fewrealignmentsandtheremovalofcapitalcontrols.Despiteaspeculativecrisisin1992–1993,leaderspressedonwithplansfortheestablishmentofasingleEuropeancurrencyasoutlinedintheMaastrichtTreatywhichcreatedtheEconomicandMonetaryUnion（EMU）.ThesinglecurrencywasviewedasanimportantpartoftheEC1992initiativewhichcalledforthefreeflowwithinEuropeoflabor,capital,goods,andservices.Thesinglecurrency,theeuro,waslaunchedonJanuary1,1999with11originalparticipants.Thesecountrieshavecededmonetaryauthoritytoasupranationalcentralbankandconstrainedtheirfiscalpolicywithagreementsonconvergencecriteriaandthestabilityandgrowthpact.Asinglecurrencyimposescostsaswellasconfersbenefits.Thetheoryofoptimumcurrencyareassuggestsconditionswhichaffecttherelativebenefitsofasinglecurrency.Thechapterprovidesawaytoframe

thisanalysisusingtheGG-LLdiagramwhichcomparesthegainsandlossesfromasinglecurrency.Finally,thechapterexaminestheprospectsoftheEUasanoptimalcurrencyareacomparedtothe

UnitedStatesandconsidersthefuturechallengesEMUwillface.

TheinternationalcapitalmarketisthesubjectofChapter21.Thischapterdrawsananalogybetweenthegainsfromtradearisingfrominternationalportfoliodiversificationandinternationalgoodstrade.There

isdiscussionofinstitutionalstructuresthathavearisentoexploitthesegains.Thechapterdiscusses

theEurocurrencymarket,theregulationofoffshorebanking,andtheroleofinternationalfinancialsupervisorycooperation.Thechapterexaminespolicyissuesoffinancialmarkets,thepolicytrilemmaoftheincompatibilityoffixedrates,independentmonetarypolicy,andcapitalmobilityaswellasthetensionbetweensupportingfinancialstabilityandcreatingamoralhazardwhenagovernmentintervenesinfinancialmarkets.Thechapteralsoconsidersevidenceofhowwelltheinternationalcapitalmarkethasperformedbyfocusingonissuessuchastheefficiencyoftheforeignexchangemarketandtheexistence

ofexcessvolatilityofexchangerates.Thechapteralsoincludesathoroughdiscussionofhowincreasedcapitalmobilityandthedifficultyofregulatinginternationalbankingcontributedtothe2007–2009financialcrisis.

Chapter22discussesissuesfacingdevelopingcountries.Thechapterbeginsbyidentifyingcharacteristicsoftheeconomiesofdevelopingcountries,characteristicsthatincludeundevelopedfinancialmarkets,pervasivegovernmentinvolvement,andadependenceoncommodityexports.Themacroeconomicanalysisofpreviouschaptersagainprovidesaframeworkforanalyzingrelevantissues,suchasinflation

inorcapitalflowstodevelopingcountries.Borrowingbydevelopingcountriesisdiscussedasanattempttoexploitgainsfromintertemporaltradeandisputinhistoricalperspective.LatinAmericancountries’problemswithinflationandsubsequentattemptsatreformaredetailed.Finally,theEastAsianeconomicmiracleisrevisited（itisdiscussedinChapter10）,andtheEastAsianfinancialcrisisisexamined.Thisfinaltopicprovidesanopportunitytodiscusspossiblereformsoftheworld’sfinancialarchitecture.

Chapter19

InternationalMonetarySystems:

AnHistoricalOverview

2 ChapterOrganization

MacroeconomicPolicyGoalsinanOpenEconomy

  InternalBalance:

FullEmploymentandPriceLevelStability

  ExternalBalance:

TheOptimalLeveloftheCurrentAccount

ClassifyingMonetarySystems:

TheOpen-EconomyTrilemma

InternationalMacroeconomicPolicyundertheGoldStandard,1870–1914

  OriginsoftheGoldStandard

  ExternalBalanceUndertheGoldStandard

  ThePrice-Specie-FlowMechanism

  TheGoldStandard“RulesoftheGame”:

MythandReality

  InternalBalanceUndertheGoldStandard

Box:

HumeversustheMercantilists

  CaseStudy:

ThePoliticalEconomyofExchangeRateRegimes:

ConflictOverAmerica’sMonetaryStandardDuringthe1890s

TheInterwarYears,1918–1939

  TheFleetingReturntoGold

  InternationalEconomicDisintegration

  CaseStudy:

TheInternationalGoldStandardandtheGreatDepression

TheBrettonWoodsSystemandtheInternationalMonetaryFund

  GoalsandStructureoftheIMF

  ConvertibilityandtheExpansionofPrivateCapitalFlows

  SpeculativeCapitalFlowsandCrises

AnalyzingPolicyOptionsforReachingInternalandExternalBalance

  MaintainingInternalBalance

  MaintainingExternalBalance

  Expenditure-ChangingandExpenditure-SwitchingPolicies

TheExternalBalanceProblemoftheUnitedStatesUnderBrettonWoods

CaseStudy:

TheEndofBrettonWoods,WorldwideInflation,andtheTransitiontoFloatingRates

TheMechanicsofImportedInflation

Assessment

TheCaseforFloatingExchangeRates

MonetaryPolicyAutonomy

Symmetry

ExchangeRatesasAutomaticStabilizers

ExchangeRatesandExternalBalance

CaseStudy:

TheFirstYearsofFloatingRates,1973–1990

MacroeconomicInterdependenceUnderaFloatingRate

CaseStudy:

TransformationandCrisisintheWorldEconomy

WhatHasBeenLearnedSince1973?

MonetaryPolicyAutonomy

Symmetry

TheExchangeRateasanAutomaticStabilizer

ExternalBalance

TheProblemofPolicyCoordination

AreFixedExchangeRatesEvenanOptionforMostCountries?

Summary

APPENDIXTOCHAPTER19:

InternationalPolicyCoordinationFailures

3 ChapterOverview

Thisisthefirstoffourinternationalmonetarypolicychapters.Thesechapterscomplementtheprecedingtheorychaptersinseveralways.Theyprovidethehistoricalandinstitutionalbackgroundstudentsrequiretoplacetheirtheoreticalknowledgeinausefulcontext.Thechaptersalsoallowstudents,throughstudyofhistoricalandcurrentevents,tosharpentheirgraspofthetheoreticalmodelsandtodeveloptheintuitionthosemodelscanprovide.（Applicationofthetheorytoeventsofcurrentinterestwillhopefullymotivatestudentstoreturntoearlierchaptersandmasterpointsthatmayhavebeenmissedonthefirstpass.）

Chapter19chroniclestheevolutionoftheinternationalmonetarysystemfromthegoldstandardof

1870–1914,throughtheinterwaryears,thepost-WorldWarIIBrettonWoodsregimethatendedinMarch1973,andthesystemofmanagedfloatingexchangeratesthathaveprevailedsince.Thecentralfocusofthechapteristhemannerinwhicheachsystemaddressed,orfailedtoaddress,therequirementsofinternalandexternalbalanceforitsparticipants.Acountryisininternalbalancewhenitsresourcesarefullyemployedandthereispricelevelstability.Externalbalanceimpliesanoptimaltimepathofthecurrentaccountsubjecttoitsbeingbalancedoverthelongrun.Otherfactorshavebeenimportantinthedefinitionofexternalbalanceatvarioustimes,andthesearediscussedinthetext.Thebasicdefinitionofexternalbalanceasanappropriatecurrent-accountlevel,however,seemstocaptureagoalthatmostpolicymakersshareregardlessoftheparticularcircumst