Class Notes (806,696)
Canada (492,414)
PPGC66H3 (7)
Lecture 3


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University of Toronto Scarborough
Public Policy
Scott Aquanno

The International Monetary Regime – Bretton Woods Standard 1944- 1971 Fixed exchange rates • allows for flexibility in monetary policy as currency stability is no logner achieved by high interest rates • allows for expansionary fiscal policy because government spending does not impact currency stability Capital Controls/limits on financial mobility • Allows for flexibility in monetary policy = can have low interest rates without provoking the outflow of capital • Allows for expansionary fiscal policy and deficit spending by preventing the outflow of capital; re-directs capital domestically = growth centred model of economic development through expansionary fiscal policy and accommodative monetary policy Basic Influences: Competing Objective Monetary Poicy: Concerns for economic growth = tend toward lower rates Concers for capital inflows -> currency values -> domestic investment Money comes and goes based on level of interest rate offered = tend toward higher rates (more restrictive monetary policy) Fiscal Deficits are unattractive for 3 reaons: Lead to higher levels of future taxation Crowd out private investment Inflationary = tend toward fiscal neutrality; limited government spending Fiscal policy is concerned with GROWTH AND CAPITAL FLOWS Monetary policy is about the same thing. Bretton Woods made it possible for us not to be concerned with CAPITAL INFLOWS One of the limits of capital growth is its ability to go anywhere it wants to.     B) The international monetary regime of the Dollar Standard 1974 - present Major Elements • No par values or long-term exchange stability; let currencies float freely on the open market based on supply and demand • Financial liberalization – free movement of capital between national borders • US dollar as the main intervention currency; keep official exchange reserves in Treasury bills Impacts: Attempts to maintain smooth short-term fluctuation by building up dollar reserves to intervene in markets to protect currency values; stabilize price level to protect domestic economy/currency = overall focus is on mkarjet adjustment and maintaining equilibrium in financial flows Now it has to concern itself with capital growth Fiscal policy is promoting growth Now economies have to be concerned with the movement of capital; they have to raise interest rates to make sure that capital comes; they want stable exchange rates Dollar standard establishes has international monetary reference point = becomes global asset Countries build up reserves to protect their currency It gives US to purse any type of monetary or fiscal policy it wants to Conclusions: International Monetary Regimes Macro-level socio-economic structures and the policy context today:
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