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2019 | OriginalPaper | Buchkapitel

8. International Monetary Policy

verfasst von : Nils Herger

Erschienen in: Understanding Central Banks

Verlag: Springer International Publishing

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Abstract

This chapter discusses the international aspects of monetary policy. These aspects include the advantages and disadvantages of fixed and floating exchange-rate regimes, the role of international reserves, the causes and consequences of currency crises, and the pros and cons of common currencies, such as the euro.

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Fußnoten
1
Mill, John Stuart, 1848: Principles of Political Economy, John W. Parker, p. 414.
 
2
For a more extensive discussion of the joint development of international trade and finance see Baltensperger, Ernst, and Nils Herger, 2010: The nexus between trade and finance, in: Cottier, Thomas and Panagiotis Delimatsis, The Prospects of International Trade Regulation - From Fragmentation to Coherence, Cambridge University Press.
 
3
The globalisation of the financial system occurred in two waves, with a first peak reached during the classical gold standard around 1900. Two world wars, the Great Depression, and the Cold War resulted in a relative downturn in international financial activity during most of the twentieth century. A second peak in global integration of the financial system was reached before the outbreak of the Global Financial Crisis in 2008. See Obstfeld, Maurice, and Allan M. Taylor, 2004: Global Capital Markets - Integration, Crisis, and Growth, Cambridge University Press.
 
4
Data about cross-border transactions are reported in the balance of payments of a given country. The balance of payments distinguishes transactions involving the exchange of goods, services, and factor income (which are summarised in the so-called ‘current account’) and transactions resulting from financial settlements and investments (which are summarised in the so-called ‘financial account’). Good introductions to the balance of payments can be found in chapter 2 of Harms, Philipp, 2016: International Macroeconomics, Mohr-Siebeck, and in chapter 13 of Krugman, Paul, Maurice Obstfeld, and Marc Melitz, 2018: International Economics—Theory and Policy, Pearson.
 
5
In contrast to purchasing-power parity, which is discussed in footnote 16 of Chap. 6, interest arbitrage is closely associated with the short-term movement of the exchange rate. In the simplest case, the corresponding formula equilibrates the returns to a domestic and foreign asset, that is,
$$\displaystyle \begin{aligned} \underbrace{\mathrm{domestic interest rate}}_{\mathrm{return on domestic assets}} \approx\underbrace{\mathrm{foreign interest rate}+\mathrm{exchange rate change}}_{\mathrm{return on foreign assets}}. \end{aligned}$$
With floating exchange rates, domestic and foreign interest rates can deviate from each other, as the corresponding discrepancy can be offset by subsequent exchange-rate changes. Conversely, under a credible fixed exchange rate, no exchange-rate changes can occur. Hence, the domestic interest rate must equal the foreign interest rate.
 
6
An example of the creative responses to capital controls is the historical development of the so called ‘euromarkets’ (which refer to certain offshore markets and have nothing to do with the common European currency, the euro). Euromarkets encompass bank deposits and other assets that are not denominated in the currency of the local financial centre. For example, dollar deposits held outside the US are called ‘eurodollars’. The creation of eurocurrency provided a clever way to avoid the capital controls and strict US banking regulations during the era of the Bretton Woods System. However, since the development of euromarkets, globally important currencies, such as the US dollar, can be traded at almost anytime somewhere around the world. Oddly, Soviet Bloc banks were among the keenest holders of eurodollars, which were useful for financing imports from Western countries and provided a certain degree of protection against a US confiscation in a time of crisis. Ironically, the former planned economies have inconspicuously fostered the worldwide integration of the foreign-exchange markets, which have turned into the most capitalistic markets the world has ever seen.
 
7
Of course, examples of capital controls still exist. However, in developed countries, capital controls are typically only used to prevent capital flight in times of severe financial turmoil. Recent examples include Iceland during the Global Financial Crisis and Cyprus during the European Debt Crisis. Furthermore, capital controls are still widely used in emerging markets and developing countries. However, the corresponding countries often lack sophisticated financial systems that are closely integrated with the international money and capital market, which facilitates the enforcement of capital controls.
 
8
A more refined and regularly updated classification of countries according to their exchange-rate regimes can be found in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions.
 
9
The theoretical reason that a country can adopt a privileged position within a fixed exchange-rate regime is that, among n currencies, only n − 1 exchange rates are defined. The last, or nth, currency is free, and the monetary policy of the corresponding country is not subject to international obligations to enforce an exchange-rate peg.
 
10
The definition of ‘international reserves’ is slightly broader than that of ‘foreign-exchange (or forex or FX) reserves’. The latter includes only foreign banknotes and assets, such as government bonds and money-market paper, that are denominated in foreign currency. In addition, the former includes, for example, gold reserves, and special drawing rights (SDRs) issued by the International Monetary Fund (IMF).
 
11
A brief discussion on popular misconceptions regarding international trade can be found in Krugman, Paul, 1993: What do undergraduates need to know about trade?, American Economic Review, pp. 23–26.
 
12
This quote appears in a pamphlet on the ‘principles of trade’ published in 1774.
 
13
For a discussion of this example see Ferguson, Niall, 2009: The Ascent of Money: A Financial History of the World, Penguin Books, Ch. 2.
 
14
A survey on the issues of trade finance can be found in Herger, Nils, 2011: Trade, Trade Finance, and Financial Crises, in: Delimatsis, Panagiotis, und Nils Herger, Financial Regulation at the Crossroads, Wolter Kluwer.
 
15
Data on the denominations of international-financial transactions can be found in the ‘Triennial Central Bank Survey’ of the Bank for International Settlements (BIS). The database ‘Currency Composition of Official Foreign Exchange Reserves (COFER)’ of the International Monetary Fund (IMF) provides a statistical account of the composition of international reserves.
 
16
In 1931, a speculative attack forced the Bank of England to abandon the gold standard (see Sect. 2.​4). Furthermore, the Bretton Woods System (see Sect. 2.​5) and the European Monetary System (see Sect. 2.​7) witnessed several episodes of severe turmoil in the foreign-exchange market.
 
17
During the second half of the 1990s, Argentina was on a currency board linking the peso with the US dollar via a one-to-one parity. This parity was installed after hyperinflation at the end of the 1980s to rebuild trust in the Argentinean currency. Despite of the positive experiences with this arrangement in the 1990s, a marked appreciation of the US dollar and, hence, the peso, paired with increasing public deficits and high rates of unemployment in Argentina eventually began to undermine this regained trust. At the end of 2001, this situation led to a speculative attack and, subsequently, a sharp devaluation of the peso.
 
18
An example for this is Germany after World War II. In particular, to tame inflation, the German mark was revalued on several occasions during the Bretton Woods era as well as within the European Monetary System.
 
19
Despite its name, the Latin Monetary Union—which provided the framework for France, Belgium, Switzerland, and partly of Italy and Greece to share the same bimetallic standard (see Sect. 2.​3)—was not a monetary union but only a multilateral agreement, which did not abolish the national currencies of the member countries.
 
20
For an assessment of the economic effects of the introduction of the euro, see Baldwin, Richard, Guiseppe Bertola and Paul Seabright, 2003: EMU: Assessing the Impact of the Euro, Blackwell Publishing.
 
21
This insight results from the ‘theory of optimum-currency areas’, as proposed by Robert Mundell (*1932), who was awarded the Nobel Prize in Economics in 1999 for, among other things, his analysis of monetary and fiscal policies in common-currency areas.
 
22
For a comparison between the US experience and the recent tensions within the euro area see Sargent, Thomas, 2011: United States then, Europe now. Lecture given upon receiving the Nobel Prize in Economics.
 
Metadaten
Titel
International Monetary Policy
verfasst von
Nils Herger
Copyright-Jahr
2019
DOI
https://doi.org/10.1007/978-3-030-05162-4_8