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17 Dec 2010
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Lecture 06
The Supply of Financial Markets and the International Monetary System:
Multilateral Cooperation & Key Currency
U.S. Dollars crisis dropped since the financial crisis
International investors are buying U.S. assets as they see it as viable still
Dollar is on the rise again
During economic times investors will flee the USD
USD is still the number one asset to rely upon
Global Currency Rivalry Centers areound the strengths and benefits of the Euro
against the USD
Benefits and costs of Key Currency System
Sources of key currency status
Future of the Dollar as key
Systemic benefits and costs:
oCan be used as medium of exchange
oUnit of account
oStore of value
oWorks as a function amongst various public/private actors
oCheck for key benefits across various functions
oThe USD has a medium of exchange
oAs a vehicle currency the USD is used to purchase goods and services and assets
across the world
oRather than trading, banks find it beneficial to trade one currency against the USD
rather than match two currencies
oUses efficiency gains gain for the banks (trading less currencies)
oUses working currency rather than several currencies
oUnit of Account: using currencies for a particular type of good (such as
homogenous goods) goods not differentiated by their quality; commodities
oReduces information costs
oUniform/similar regardless of where and how it is produced the markets are
highly competitive
oDemand uncertainty causes this competition/values when exporters currencies
appreciate domestic value; they reduce demand uncertainty
oPricing goods when they are easily identifiable and substitutable
Not true if the commodity can be distinguished; price differences resulting
from quality
oHedging against either demand or against price (revenues) systemic benefit
oA single currency versus multiple currencies
oVolatility in the exchange rate of the key currency is an issue this raises
information costs
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Document Summary

The supply of financial markets and the international monetary system: International investors are buying u. s. assets as they see it as viable still: u. s. since usd declines their currency should decline. may result in welfare loss; extremely risky. they do this because it makes their export goods cheaper; enhances their competitive advantage. If firms inside the country find that domestically their products are not selling then they will take advantage by depreciating their currency: when one currency depreciates then another currency will appreciate (the way the system works) appreciating countries will institute tariffs and trade barriers to help their currency depreciate leading for generalized trade wars; this leads to an economic trade system protectionist system. trade wars are tit for tat mechanisms/retaliations where everyone tries to: benefits to key currency country: protect their trade everyone is worse off (prisoners dilemma, seignorage privilege of printing money.

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