Transcript A Tour of the World

EC0 463
International Monetary Relations
Professor Malamud
BEH 502
895 – 3294
Email: [email protected]
Website: http://faculty.unlv.edu/bmalamud
Office Hours:TTh 1 – 2 pm; 4 – 5 pm; and by
appointment
International Monetary Relations
It’s about:
– Exchange Rates & Balance of Payments
• How they’re determined in an open economy
• How they affect an open economy
What you’ll gain:
– Command of challenging MODELS
• Hone your skills of economic analysis
– A feel for the international economy
– Appreciation of floating and fixed exchange
rates
• Strengths and drawbacks
• How policy works … and doesn’t work … under each
regime
– Cocktail party and job interview talking points
The Course: Divided in Three Parts
• The Global Economy
• Follow the money … B of P accounts
• Exchanging the money
• Modeling the Open Economy
• Interest rates and exchange rates
• Money, interest and exchange rates (short-run, P
fixed)
• PPP (long-run, P adjusts)
• Output, interest and exchange rates (short-run)
• Fixed exchange rates
• International Monetary History and Institutions
• Fixed vs flex
• OCA (Optimal Currency Areas)
– what’s wrong with the euro?
A Tour of the World: January 2012
Global Economy Under Stress
•Locomotive of the 1990s and early 2000s…now slowed
•Lender of last resort in the ‘90s …
–Mexico ’94 - 95 … East Asia ’97 - 98
•World in Recession – Financial Crises
–Ballooning US Budget Deficit/Trade Deficit
–Housing Bubble … Credit Crunch
–Flight to /from U.S. investments? … Depreciating Dollar?
–Rebalancing
–Been there – done that …
–Kindleberger, World In Depression:1929-39
–Eichengreen, Golden Fetters
–Bernanke, Essays on the Great Depression
•Can others propel growth? Japan/EU/BRIC
–Post-bubble Japan
–Europe: Stability and Growth(?) Pact—The PIIGS
–China: Grand Ambitions … Undervalued currency
–India: Great Potential/Brazil: The country of the future?/Russia(?):
From Gillian Tett, Fool’s Gold
The sun slipped slowly down the cerulean Spanish sky….[S]everal hundred
bankers stood on the elegant terrace of a futuristic, gleaming white hotel,
staging a so-called champagne salute in celebration of the fact that
investment banks had just enjoyed their most lucrative year in history. The
date was June 11, 2007 and the occasion was the annual meeting of the
European Securitisation…The meeting carried a lofty title: “Global Asset
Backed Securitization: Toward a New Dawn.” An exuberant crowd including
smooth talking, white toothed salesmen from large American banks, eagerly
selling repackaged mortgage debt; self-deprecating British traders; and
earnest, chain-smoking representatives from German insurance companies
and banks. Their prey included asset managers from Italy, Spain, Germany,
and Greece…A silent gaggle of Chinese and Singaporeans circulated. It
was rumored that they were furtively buying CDOs to find a home for foreign
exchange reserves. A few regulators could also be spotted, conspicuous in
looking generally dowdier than the bankers. Some of the biggest
delegations, though, came from the three credit rating agencies that were
drawing fat profits from the CDO boom…Lively debate ensued about the
American mortgage backed bond market, the CDO sector, the SIVs, the
state of the Spanish mortgage market and the outlook for Russian ABS.
There was even a high-profile debate on Islamic finance [which] some
hoped would be a hot new growth area for securitization…
The $’s Exchange Rate
Volcker
Disinflation
Dot-com bubble
Dot.com
Bubble
…Rebalancing…
…Rebalancing……...
6
Volcker
Disinflation Volcker
Disinflation
Oil OilOil
Shock
Shock Shock
Great
Recession
Great Recession
Great
Recession
Natural Rate
Unemployment Rates & Year-to Year GDP Growth, Summer 2009
USA
Japan
China
Britain
Canada
Eurozone
France
Germany
Italy
Spain
Ireland
Russia
India
Korea
Argentina
Brazil
Iceland
Summer ’09
9.4%
5.4
9.0
7.8
8.6
9.4
2010
9.4%
5.1
4.1
7.9
7.6
9.7
9.4
8.3
7.3
18.1
12.2
10.1
6.7
8.2
20.1
13.9
8.3
6.8
3.8
8.4
8.1
8.1
9.2
4.1
3.7
7.0
5.7
7.6
Sample Exchange Rates
Foreign Currency/US$
Japan
China
Britain
Canada
Eurozone
India
Mexico
Jan 11
83.2
6.60
0.63
0.99
0.76
45.5
12.08
Jan 12
76.9
6.31
0.65
1.02
0.79
51.7
13.6
% $ Appreciation
- 7.6%
- 4.4%
+ 3.2%
+ 3.0%
+4.0%
+13.6%
+12.4%
Balance on Current Account as Fraction of GDP
Dates
… and Places
April 1925 UK returns to gold
October 1929 The Great Crash
• Bretton Woods, ’44: IMF, IBRD
Sept 1931 UK leaves gold
Aug 15, 1971 Nixon Econ Program
– Vietnam, 1964…
• Gold window closed/Import surtax/Wage/Price
Freeze
October 1973 Arab Oil Embargo
Oct 6, 1979 VolckerMonetarist experiment
1982+ Third World Debt Crisis
• Plaza 9/85 – Louvre 2/87
February 1985 $ - £ “parity”
– Japan bubble
Oct 19, 1987 Black Monday
• Maastricht, 1991
Nov 9, 1989 Berlin Wall Down
• Washington Consensus
September 1992 ERM Collapse
December 1994 Tequila Crisis
Aug 1997 – 1998 East Asia Crisis
Sept 1998 Long Term Capital Management
Jan 1, 1999 €
• Basel I,II,… 1988, 2004
Sept 11, 2001
January 2002 Argentine Peso Collapse
August 2007 US Mortgage Bubble Collapse
2008 US/UK/Ireland/Spain Housing Bubble Collapse
Credit Crunch:Bear/Fannie/Freddie/Lehman/Merrill
• PIIGS…2010 –
AIG/TARP/Currency Swaps