POLI 243 Lecture Notes - Bretton Woods System

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midterm : theories, evidence, explanation
18th feb
a national govt. issuing currency, to attract/promote it as an intl. medium
of exchange
Key currencies : Advantages
competitive edge in financial services : better financial position
bargaining leverage over other states : if foreigners in need of intl. money
can only get it from your citizens, then the govt. can exercise
sovereignty and control who can handle these transactions, who can
enter border etc. Having everyone else use your money gives govt.
power over outside actors
ability to run trade deficits : others would take your money. E.g. US,
difference made by paying its own money out. The country gets an
advantage of dealing with deficit problems
impetus for outward foreign investment : individuals have advantage of
going out, establishing their firms outside the country. FDI wherein a
firm buys an existing business
Disadvantages :
currency "overhang" : to get everyone interested in using your currency is
challenging , you're trying to push enough money to help
international economy. You can't force others to use it, people have
to believe that its gonna be worth something in the future. A need
to develop confidence among actors in intl economy. Too much
paper money/credit in the system that you have reserve asset
(overhang). One of the reasons why Bretton Woods system breaks
down. US demonstrating : if there is no backing to US dollar, people
have confidence because they think they'd spend it in US. That
would cause an inflationary surge.
trade deficit can get too big
constraint on domestic options : how do you manage this currency
(domestic vs intl concerns). 2008 financial meltdown, in order to
stimulate econ. recovery, make interests low so people can borrow
easily. Pushing price down in domestic, the US dollar goes down.
That attacks confidence of people internationally. Now there is an
alternative, Euro.
Competing liberal theories of monetary policy
defining the dominant cleavage :
Domestic interests concerning monetary policy - competing
notions about the dominant interest
hard money or soft : creditors vs. debtors. High interest rates preferred by
creditors, low rates for debtors, more liquidity.
effect on trade competitiveness : tradable (goods/services in international
trade, worry about exchange rate,export more so that foreign goods
look expensive ) vs. non tradables (goods/services not affected by
foreign competition, does not affect their ability to offer their
services to people)
import consuming or not : middle vs. lower class. What goods you
consume? A declining exchange rate does not ket you buy more
from abroad and vice versa. e.g. Latin America
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Document Summary

18th feb a national govt. issuing currency, to attract/promote it as an intl. medium of exchange. Having everyone else use your money gives govt. power over outside actors ability to run trade deficits : others would take your money. Us, difference made by paying its own money out. The country gets an advantage of dealing with deficit problems impetus for outward foreign investment : individuals have advantage of going out, establishing their firms outside the country. Fdi wherein a firm buys an existing business. Disadvantages : currency overhang : to get everyone interested in using your currency is challenging , you"re trying to push enough money to help international economy. You can"t force others to use it, people have to believe that its gonna be worth something in the future. A need to develop confidence among actors in intl economy. Too much paper money/credit in the system that you have reserve asset (overhang).

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