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Poli Sci 2J03 - Feb 12, 2014

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McMaster University
Political Science
Robert O' Brien

Started on: 2/6/14 9:40AM C LASS N OTES FOR : P OLI S CI 2J03 McMaster University, Winter 2014 W EDNESDAY , FEBRUARY 12, Y Global Financial System - Overview - Definitions o Bretton Woods, IMS, Credit System - Perspectives o Mundell-Fleming - Developments o Floating rates  International Monetary System o Financial innovations  Applicable to both the IMS and the Credit System o 1980s debt crisis  Global credit system - Key Issues Developments - Floating rates o System set up at the end of the second world war (dollar exchange system) where the dollar was pegged to gold and other currencies were pegged to theAmerican Dollar, it was crucial in getting countries to re-establish economic relations. o August 1971 Nixon Shock  It refers to the action of President Nixon, where he decided to unilaterally end the fixed exchange rate.  Why was there a unilateral move to change the way the international system worked  United States was loosing compared to Japan  Europe and Japan fixed and pegged to the American dollar (reflecting the weakness of their economies and fixed at a low rate against the dollar), it was easier for them to export items into the United States.  Low exchange rate from Europe and Japan gave them a comparative advantage. • In response to this NIXON  Changing the Global System (Demonstration ofAmerican power); we are no longer participating in this fixed exchange rate, going to let the value be determined by the relative strength of their economies. • It was going to be determined by Supply and demand. • If you let the currencies float and react to market forces, they should reveal and mirror the actual strength of the underlying economies. • The idea was to bring economies into balance o Fluctuating rates created trade tensions  1980s US$ overvalued because of high interest rates, trade deficits with Europe andAsia Angie © McMaster University 1 Winter 2014  Value of the dollar high in comparison • High interest rates, attracted a lot of money into the United States • Gov’t was spending more than it was taking in taxes and as a result raised their interest rates • As the value of the currency was going higher, this meant that the United States was running a trade deficit • United States became concerned about other unfair trade practices, (e.g. Japan). o Protectionism in the United States was increasing that the Canadian gov’t decided it needed a trade agreement in the US to get around the protectionism that was going there. o Relationship between monetary and trade system o Politically it is always easier to mobilize against trade issues than it is monetary issues o In Europe, the desire for monetary stability it lead to ERM (then the Euro) o The central banks would monitor the currency markets o Speculation makes managed and fixed exchange rates difficult Power of financial flows - 1992 UK committed to keeping its currency in ERM - August of 1992 - The United Kingdom (GB) had committed to eventually joining the Europe and was participating in this exchange rate mechanism (committed to keeping their curre
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