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Econ 243

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Political Science
POLI 243

Chapter 8 The Importance of International Monetary Regimes 1) Liquidity-Central Banking systems in domestic level have to be replicated in international monetary regime where states can borrow money to have transactions. 2) Confidence-Monetary system to have confidence that one will pay. 3) Money is a public good. a. Free Riding- countries will take advantage of the regime and would manipulate the currency value. There is stable system, so you make use of it, while not directly impacting others. But in monetary system, it hurts others unlike normal FR. b. Beggar thy neighbor-lower the value of currency so that its exports are more competitive. Then, its not like free riding because it hurts the others by selling own goods. Competitive devaluation occurred 1) 4 characteristic a. Exchange rates i. Value of currency relative to other currency ii. Fixed 1. State decide what exactly the currency is worth (ex. Gold) a. $20.67=1 ounce gold b. Government allow you to buy 1 ounce of gold with $20.67 c. Fixed the currency to other currency (peg the currency to US dollars) (due to koubairyokuheika?) d. Stable- you always know how much it is, and you dont lose money even if you keep it e. Too rigid- Market forces impact value of currency but if it is pegged, it wont change; causing distortions in currency. When problem become so large, states will change the currency, by large rates which impact monetary relations greatly iii. Floating 1. Value decided by market factors a. Demand for currency b. Confidence in currency c. Speculations d. Dirty Float i. Exchange rate interventions: buying and selling currency to influence value 1. Central Bank under state buy own currency and rise value, or lower by selling it 2. Flexible, but vulnerable to Opportunism & Volatility a. Devaluing currency crash b. Less confidence iv. C. MANAGED FLOATING 1. Exchange rate 2. Coordinated exchange interventions a. States agree on some intervention to prevent beggar thy neighbor b. Bilateral agreements- to the degree agreed to both sides; bargain something out between states for manipulation i. Power bargaining occur-big states have the most power for agreements 3. Responsible (?) manipulation prevents BTN? b. Reserve Systems i. Central Bank of state holds back some money or valued good so it has a degree of capital to prop up its economy. (more important in fixed exchange rate, to assure payment) 1. Ex: Gold (intrinsic value) 2. Ex: Hard Currency (US dollar, Euro, UK Sterling, Yen) (baskets) 3. SDR (Special Drawing Rights) a. IMF money=money that IMF has, which states can use as well when bankruptcy danger c. Capital Movement i. Full Convertibility-Citizen of a country take own money, convert it, and invest on somewhere else without capital control ii. Controlled-state has perfect control iii. Effects on currency value and interest rates 1. If no control-Increase in investment can lead to inflation, while decrease can cause rapid currency devaluation d. Political Management i. International equivalent of the central bank 1. Constantly making sure of liquidity, and investors have confidence 2. Provide key currency 3. Provide currency to you for sure so that unreasonable loss wont occur and provide assurance of no cheating by (law in domestic) hegemon? ii. Hegemonic actor=make people agree and follow the rules of the game (US Breton-Woods) iii. State provide currency, supply another currency which could increase revenue, which US when hegemon can benefit (how) 1. In any central banking system where it can produce currency, there are ways of book keeping which can allow the system to profit, and increase revenue by creating money. Canadas transition from paper dollar to
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