PSCI 4356 Lecture 5: After Bretton Woods

2 Pages

Political Science
Course Code
PSCI 4356
Peinhardt Clint

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5102017 OneNote Online After Bretton Woods Monday, April 3, 2017 8:37 AM The Adjustment Problem Coordinating monetary policy became really import postBW Plaza Accord was a success Louvre Agreement was a failure However these agreements were often really short in impact Negotiating imbalances became a focus The Foreign Exchange Market Largest market in the world 5.1T turnover daily as of April 2016 Slightly down from 5.4T in 2013 Majority of currency trades are taken for speculative purposes (arbitrage) USD is one side of 88 of all trades Renminbi recently doubled to 4 to be the second Primary site of trading: UK (37), US (20), Euro area (8), Singapore (7.9), HK (6.7), Japan (6.1) Determinants of Exchange Rate Regimes Supply and demand in markets determine the floating exchange rate Hard pegs Arrangements with no separate legal tender: currency of another country circulates as sole tender Currency board arrangement: domestic currency is exchanged for a specific foreign currency Soft pegs Conventional fixed peg: currency fluctuates for at least three months within a band of <2 against other currencies Intermediate pegs Floats Managed floating with no predetermined path for exchange rate Free floating Many countries try to be in the middle with soft pegs or managed floats The Euro Zone The politics of Exchange Rates Winners and Losers Electoral Model Assumption: voters choose candidates based on personal income effects Prediction: governments change policies near elections to influence outcomes Example: Nixon closed the gold window devalued dollar for 1972 election Weakness: explanation provides little info in nonelectoral times Also not deterministic governments sometimes have incentive to change policy Partisan Model Phillips Curve Tradeoff between inflation and unemployment Prediction: left prefers fighting unemployment, right prefers fighting inflation Example: unemployment rates 2 higher under R than under D presidents Prediction: preferences for exchange rates: Leftists parties less likely to maintain fixed rates If the choice is between domestic autonomy stability, they will prefer autonomy Weakness: took stark a differentiation of the two sides Also uncertainties about Phillips Curves Sectoral Model Incorporates two exchange rate decisions: level and regime Four groups: Importcompeting producers Exportoriented producers Nontradables Financial services Weakness Always possible to find beneficiaries of a given policy choice Not always true their lobbying made a difference in political battle Public opinion regarding exchange rate policy is less interventionist and more reactive Monetary Policies Credible Commitments to Inflation!45798cid=15cdbb404d6f9171app=OneNoteauthkey=!Al 12
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