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1、Chapter 14 The International Financial System Intervention in the Foreign Exchange Market Foreign Exchange Intervention and the Money Supply Inside the Fed Box:A Day at the Federal Reserve Bank of New Yorks Foreign Exchange Desk Unsterilized Intervention Sterilized Intervention Global Box:Why the La
2、rge U.S.Current Account Deficit Worries Economists Balance of Payments Exchange Rate Regimes in the International Financial System Fixed Exchange Rate Regimes Global Box:The Euros Challenge to the Dollar Global Box:Argentinas Currency Board Global Box:Dollarization Case:The Foreign Exchange Crisis o
3、f September 1992 The Practicing Manager:Profiting from a Foreign Exchange Crisis Case:Recent Foreign Exchange Rate Crises in Emerging Market Countries:Mexico 1994,East Asia 1997,Brazil 1999,and Argentina 2002 Case:How Did China Accumulate Nearly$1 Trillion of International Reserves Managed Float Cap
4、ital Controls Controls on Capital Outflows Controls on Capital Inflows The Role of the IMF Should the IMF be an International Lender of Last Resort How Should the IMF Operate?Chapter 14 shows why international financial transactions have important implications for the conduct of monetary policy.The
5、beginning of the chapter explains how foreign exchange market intervention affects both the exchange rate,a countrys international reserves,and the money supply.It then discusses the balance of payments,but this sometimes dry topic can be spiced up for students by a discussion of the box on why larg
6、e current account deficits worry economists.Chapter 14 The International Financial System 81 The chapter then goes on to discuss how fixed exchange rate systems work.Three applications in this section make the material come alive for students.The first examines how China has accumulated close to$1 t
7、rillion of international reserves,a subject of great interest to students.The next two examine the September 1992 foreign exchange crisis and recent foreign exchange crises in emerging market countries.These applications capture the imagination of students because huge profits were made during these
8、 crises and because government intervention in the markets was massive.These applications also give students further practice with the model of the foreign exchange market developed in Chapter 13.The currency and financial crises in Mexico,East Asia,Brazil,and Argentina in recent years have caused p
9、olicymakers throughout the world to focus on how the architecture of the international financial system might be reformed in order to limit the threat of financial crises.Concerns about international financial architecture have led to a lively debate,to say the least,about the role of the Internatio
10、nal Monetary Fund and capital controls.I use the discussion in the text on these subjects to stimulate a lively debate among the students,which gets them to realize that what happens outside the United States is still of tremendous importance to us.1.The purchase of dollars involves a sale of foreig
11、n assets which means that international reserves fall.However,the offsetting open market purchase means that the monetary base and the money supply will remain unchanged.There is thus no change in the expected return on dollar assets,so the demand curve does not shift and the exchange rate also rema
12、ins unchanged.2.The purchase of dollars involves a sale of foreign assets,which means that international reserves fall and the monetary base decreases.The resulting fall in the money supply causes interest rates to rise and lowers the future price level,thereby raising the future expected exchange r
13、ate.Both of these effects raise the expected reurn on dollar assests at any given exchange rate,shifting the demand curve to the right and raising the equilibrium exchange rate.3.a.A receipt in the capital account;b.a payment in the current account;c.a receipt in the method of financing;d.a receipt
14、in the current account;e.a payment in the current account;f.a payment in the capital account;and g.a receipt in the capital account.4.Because other countries often intervene in the foreign exchange market when the United States has a deficit so that U.S.holdings of international reserves do not chan
15、ge.By contrast,when the Netherlands has a deficit,it must intervene in the foreign exchange market and buy guilders,which results in a reduction of international reserves for the Netherlands.5.The increase in British productivity would create a tendency for the pound to appreciate relative to the do
16、llar.The higher value of the pound would now cause Americans to exchange dollars for gold,ship the gold to Britain,and then buy British pounds with the gold.The result is that British holdings of gold(international reserves)would increase,which would raise the money supply because the monetary base
17、would increase.The higher British money supply would then tend to lower the exchange rate back down to its par level because it would cause the price level to rise,which would lead to a depreciation of the pound.82 Mishkin/Eakins Financial Markets and Institutions,Sixth Edition 6.Two euros per dolla
18、r.7.The situation would be as depicted in Figure 2,Panel(b).The central bank would need to sell domestic currency and buy foreign assets,thus increasing its international reserves and the monetary base.The resulting rise in the money supply would then lead to a decline in the domestic interest rate
19、which would decrease the expected return on dollars,shift the demand curve to the left so that the equilibrium exchange rate would be at par.8.A large balance-of-payments surplus may require a country to finance the surplus by selling its currency in the foreign exchange market,thereby gaining inter
20、national reserves.The result is that the central bank will have supplied more of its currency to the public,and the monetary base will rise.The resulting rise in the money supply can cause the price level to rise,leading to a higher inflation rate.9.True,because when the exchange rate is falling,the
21、 central bank must buy its currency,which lowers its holdings of international reserves and its monetary base.Similarly,when the exchange rate is rising,it must sell its currency,which raises its holdings of international reserves and its monetary base.The necessary central bank intervention to keep
22、 its exchange rate fixed thus affects the monetary base and hence the money supply.10.Countries may implement a contractionary monetary policy when they decide to intervene in the foreign exchange market and buy domestic currency to finance the deficit.The result is that they sell off international
23、reserves and their monetary base falls,leading to a decline in the money supply.11.False.As seen in the chapter,a reserve currency country,such as the United States,can have its balance of payment deficits financed by foreign central banks,leaving its international reserves unchanged.12.When other c
24、ountries buy U.S.dollars to keep their exchange rates from changing vis-vis the dollar because of the U.S.deficits,they gain international reserves and their monetary base increases.The outcome is that the money supply in these countries grows faster and leads to higher inflation throughout the worl
25、d.13.False.Inflation occurred when the world was under the gold standard before World War I.The gold discoveries in the Klondike and South Africa before World War I led to a continuing increase in the quantity of gold,which caused a more rapid growth in money supplies throughout the world.The result
26、 was worldwide inflation.14.There are no direct effects on the money supply because there is no central bank intervention in a pure flexible exchange rate regime;therefore,changes in international reserves that affect the monetary base do not occur.However,monetary policy can be affected by the fore
27、ign exchange market because monetary authorities may want to manipulate exchange rates by changing the money supply and interest rates.15.Uncertain.Although after 1973,countries no longer must intervene in the foreign exchange market to keep their currencies at a par level and so could pursue more i
28、ndependent monetary policy,they have not chosen to do so;rather,they have continued to engage in substantial intervention in the foreign exchange market.Thus they continue to have substantial fluctuations in international reserves,which affect their money supply.Chapter 14 The International Financia
29、l System 83 16.Although capital outflows can harm a country when they lead to a devaluation of the domestic currency,controls in capital outflows are generally not thought to be a good idea.They are seldom effective in a crisis because the private sector figures out ways to get around them;they may
30、even stimulate further capital outflows because they weaken confidence in the government.They also can lead to corruption and may also encourage governments to procrastinate and not take the steps necessary to reform their financial systems.17.By keeping out capital inflows,there may be less specula
31、tive capital to flow out during a crisis and a lower likelihood that capital inflows will fuel a lending boom and excessive risk-taking on the part of banks.On the other hand,capital controls on inflows keep funds that would be used for productive investment from entering a country.Capital controls
32、on inflows might also produce substantial distortions and misallocations of resources and also lead to corruption.18.Engaging in a lender-of-last resort operation is likely to weaken the credibility of the central bank and lead to inflation and an even larger depreciation of the domestic currency.Be
33、cause debt is short-term and denominated in foreign currency in emerging-market countries,the depreciation would lead to a deterioration of balance sheets;thus,the lender-of-last resort operation is likely to make the financial crisis even worse.19.Some critics think not.They believe that IMF lendin
34、g which was used to bail out foreign lenders makes financial crises more likely:These these lenders then expect to be bailed out and thus provided funds that were used to fuel excessive risk taking.Critics also believe that lending to the Russian government encouraged it to resist adoption of approp
35、riate reforms to stabilize its financial system.The IMF has also been criticized for imposing austerity programs which makes it easier for politicians to mobilize public opinion against doing what is necessary to reform the financial system.On the other hand,if the IMF had not provided funds to coun
36、tries in trouble,their financial crises might have been much worse.20.The international lender of last resort needs to make it clear that it will extend liquidity only to governments that take measures to prevent excessive risk taking.It can also reduce moral hazard by restricting the ability of gov
37、ernments to bail out stockholders and large uninsured creditors of domestic financial institutions.1.The Federal Reserve purchases$1,000,000 of foreign assets for$1,000,000.Show the effect of this open market operation using T-accounts.Solution:Federal Reserve System AssetsLiabilities Foreign assets
38、$1 million Currency in circulation$1 million (international reserves)2.Again,the Federal Reserve purchases$1,000,000 of foreign assets.However,to raise the funds,the trading desk sells$1,000,000 in T-bills.Show the effect of this open market operation using T-accounts.Solution:Federal Reserve System
39、 84 Mishkin/Eakins Financial Markets and Institutions,Sixth Edition AssetsLiabilities Foreign assets$1 million Currency in circulation (international reserves)Government bonds$1 million Chapter 14 The International Financial System 85 3.$1.274 per euro.Note that since the exchange rate is quoted as$
40、per euro,the euro is the domestic currency.The interest parity equation is as follows:0.04 0.02 1(1.30)/1.30=etE 1(1.30)/1.30etE 0.02 0.04 0.02 1etE 1.30 1.3(0.02)1.30 0.026$1.274 per euro Another way to get the answer is to recognize that the interest rate differential between implies that the euro
41、 is expected to depreciate by 2%which implies a decline of 2%of 1.30 which is 0.026 over the year to$1.274 per euro.4.$1.287 per euro.Note that since the exchange rate is quoted as$per euro,the euro is the domestic currency.From the previous problem 1etE$1.274 per euro and the interest rate on euro
42、deposits rises to 5%.Again using the interest parity equation:0.05 0.02 (1.274 Et)/Et (1.274 Et)/Et 0.02 0.05 0.03 Et 1.274 0.03 Et 0.97 Et 1.274 Et 1.274/0.97$1.287 per euro Another way to get the answer is to recognize that when the interest rate on euro deposits rises by 1%,the euro must have an
43、additional expected depreciation of 1%which means that the initial level of the euro must fall by 1%from 1.30 to 1.287 per euro.5.If the balance in the current account increases by$2 billion while the capital account is off$3.5 billion,what is the impact on governmental international reserves?Solution:Current account capital account international reserves 2 3.5 1.5 Governmental international reserves are down by$1.5 billion.