PSCI 152 Lecture Notes - Lecture 10: Open Market Operation, Bretton Woods System, Fixed Exchange-Rate System
12 Dec 2016
School
Department
Course
Professor
Document Summary
Balance of payments international transactions a country has with the rest of the world: current and capital accounts. If they don"t balance imbalance of payments: good/service terms + financial investments, fixed exchange rate requires government intervention. Imbalance between supply and demand for domestic currency. Intervene by purchasing currency on exchange market or through quantitative easing (but generally: floating exchange rate changed by market factors or imbalance in exchange market. Unholy trinity ***: mundell-fleming trilemma: only 2 of 3 objectives can be achieved simultaneously. Free capital flows: trade off between fixed exchange rate and independent central bank. Can"t have both because fixed exchange rate restricts independent central bank: capital flows are more or less a given in modern world. Why we focus on independent monetary policy/fixed exchange rate: bretton woods system tried to achieve all 3. Allowed government to intervene only when there was an imbalance. Some independent monetary policy and some fixed exchange rate.
