Political Science 2211E Chapter Notes - Chapter 1: 1997 Asian Financial Crisis, Impossible Trinity

• School: Western University
• Department: Political Science
• Course: Political Science 2211E
• Professor: Adam Harmes

Document Summary

Concept that governments can only achieve 2/3 economic goals. Capital mobility: ability of investors to move their money in and out of country when they want to. Government can control this through capital controls. Fixed exchange rates: keeping value of nation"s currency stable in relation to other currencies in order to better facilitate international trade. Discretion over monetary policy: government"s control over interest rates exercised through national central banks. Helps governments fight recessions and maintain a sustainable balance between very low unemployment and very low inflation. Inflation too high = central bank "contractionary" policy of raising interest rates. Firms and households reduce spending -> less disposable income, everything"s more expensive. Unemployment too high = central bank "expansionary" policy of lowering interest rates. More disposable income; more demand = more employment. Before great depression and during ww1, capital mobility + fixed exchange. After ww2: fixed exchange + discretion over monetary policy. Allowed us to absorb shock of asian financial crisis.