BSLW1021 Lecture Notes - Foreign Exchange Risk, Foreign Exchange Market, Eurozone
11 Mar 2014
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Document Summary
Trilemma of international macroeconomics policy makers have three desirable goals: 1. Stable exchange rate (promotes trade and foreign investment). Independent monetary policy (provides tools to manage the business cycle). Free capital movements (promotes integration, efficiency, and risk sharing). Trilemma impossible to achieve all three goals at the same time. Promotes stability in trade and investment (limits foreign exchange risk) Strict limits on ability to conduct monetary policy. Trade with eurozone important and they therefore need stable exchange rate. Can either peg, abandon monetary independence, float and keep independence. Allowing wider band around pegs create opportunity for some independence (temporarily). Depend heavily on exports to us and need stable exchange rate with. * gold standard (free capital mobility, no monetary independence 19-20 cent. ) and bretton woods (post wwii-early 70s, no capital mobility, independent monetary policy) were also systems of pegs. Currently the us chooses capital mobility and monetary independence: volatility of exchange rate. Why prices are higher in developed countries: balassa-
