Please enable JavaScript.

Coggle requires JavaScript to display documents.

Global Economics (Chapter 4 (Zero Lower Bound (ZLB): The point at which…

- - - - Float: Home monetary authorities choose money supply.
      - Fixed: Home monetary authorities choose the fixed level of exchange.
- - - - Capital Gains
      - Debitor Nation: Country that owes money to other nations.
      - Creditor Nation: Country that donates money to other nations.
- - - - Overvalued: The monetary value is not worth its dollar amount.
      - Undervalued: The monetary value is worth more than its valuation.
    - - Hyperinflation
      - Currency Reform: The intervention of a nation to aid in the adjustment of the valuation of currency.
  - - - Central Bank: Controls money supply of a nation.
        
        Independent Central Bank: Operational freedom of inflation rates.
      - Money Supply: Equals the demand for real money balances.
    - - Money Demand: Increased national income will proportionately increase spending, thereby stimulating the economy.
        
        Real Money Demand: The comparative demand of a nation's currency as opposed to another nation's.
      - Quantity Theory of Money: Demand is proportional to income.
    - - Price Level: The nominal supply of money to the demand.
  - - - Exchange Rate Target: An anchor placed on the exchange rate, though the inflation rate would be adopted from foreign countries.
      - Money Supply Target: An anchor placed on the money supply, although real income growth may become unstable.
      - Inflation Target: The home national interest rate minus the foreign real interest rate.
- - - - Marginal Propensity to Consume (MPC): How much disposable income is spent on consumption
      - Real Effective Exchange Rate: Weight applied in home country rates
  - - - Nominal interest rate (i) - expected inflation rate (pi)
  - - - Government Purchases
  - - - Market Equilibrium
      - "Cross" referring to the intersection of the two lines, where D = Y
    - - MPC = > demand curve slope
  - - - Point of equilibrium where intersection occurs
      - Not affected by interest rate or output
      - Factors that require adjustment
        
        Decreased taxes
        
        Increased government spending
        
        Price change (foreign / home)
        
        Increased consumption
        
        Increased investment
        
        Increased trade balance
    - - Shifts
        
        Increased money supply
        
        Change in money demand
  - - - Money supply changes
    - - Government Spending
      - Tax Reforms
    - - Efforts to keep economy at max capacity
        
        Requires stable economy
- - - - Uncovered Interest Parity (UIP): Difference in interest rates will reach equilibrium in time.
    - - Rate of Return: Return + / - capital gains or capital losses
        
        Risk
        
        Liquidity: Ability to turn assets into currency.
      - Cross-Rate: Ratio of two exchange rates
- - - - Ponzi Game: Rolling interest on a loan into the principle
    - - Small Open Economy: Allowing for foreign trade, imports and exports
      - World Real Interest Rate (r): Constant variable
      - Expenditure = Production
    - - Present Value
        
        GDP + Initial wealth = GNE
      - Perpetual Loan: interest-only
  - - - Sudden Stop: Nation's creditors stop lending
  - - - Developed
      - Increased Communication
      - Increased Trade (Trade Barrier Decrease)
      - Output = Productivity x Capital
        
        Technical Efficiency
        
        Social Efficiency
      - Convergence: Investment until similar productivity
      - Divergence: Divide between rich and poor countries
    - - Precautionary Saving: In case of crisis as a "rainy day fund"
        
        Foreign Reserve
        
        Soverign Wealth Fund: State owne
    - - Output Shock
      - FC: Consumption = Output
- - - - integration = > efficiency benefits
      - symmetry = < stability costs
        
        Symmetry requires contributions from cooperative countries
      - Not good, nor bad, at ensuring low inflation rates
      - Involve multiple nations as cooperative countries
        
        Interest Rates
        
        Exchange Rates
        
        Devaluation
        
        Revaluation
      - Reserve Currency System
  - - - Fixed exchange rates where country's currency pegged to an ounce of gold
    - - Fixed rates are more appealing to these countries
  - - - Open Peg: Open capital markets with fixed exchange rate
        
        Most volatile output; least control over monetary policies
      - Open Nonpeg: Open capital markets with floating currency
      - Closed: Close off capital markets from foreign trade
- - - - Private Sector
        
        Banks
        
        Financial Institutions
      - Adverse Shocks
      - Bankruptcy
      - Likelihood increases significantly during an exchange rate crisis
    - - Public Sector
      - Adverse Shocks
      - Government
      - Inability to pay foreign debts
        
        Principle
        
        Interest on debts
      - Likelihood increases significantly during a banking or default crisis
      - Twin Crises: in pairs
      - Triple Crises: in threes
    - - Increased risk
        
        Larger crises in emerging markets than developed
  - - - Central Bank Balance Sheet
        
        Assets - Liabilities
        
        Money Supply = A - L
        
        Graphical Representation
        
        Floating Line
        
        Fixed Line
        
        Currency Board System
        
        Fixed Rate System
        
        Reserves = 100% of Money Supply
  - - - Money supply (M) backed by reserves (R)
      - Included in the Balance Sheet
    - - Usually higher for emerging markets
      - Interest Rate Spread
        
        Currency Premium
        
        Country Premium
    - - Sterilization Bonds
    - - Insolvency: liabilities > assets
        
        Bailout: monetary rescue by banks
        
        Illiquidity: cannot readily convert assets to cash
        
        Bank Run: When too many investors attempt to withdrawal
        
        Lender of Last Resort
    - - Inconsistent
      - Fixed-Exchange Rate
      - Was applied to many Latin American countries in crisis during the 80s
      - Issue
        
        Fiscal Dominance
    - - Issue
        
        Contingent Commitment: maintaining the peg could be detrimental to the economy, causing abandonment
      - Self-Confirming Equilibrium: investors believe government actions
- - - - Common Currency
    - - Monetary control in all Eurozone countries
      - Countries are represented in the Eurozone council
        
        Countries still regulate and supervise their own financial systems
      - Inflation targets for implementing monetary policy
      - Draws heavily on the German Model
    - - Benefits adopting country as well as the home country
      - Volume between cooperative countries increase
      - Economic Symmetry
        
        Symmetric shocks
        
        Monetary Union
        
        Maastricht Treaty
        
        Signed in 1992
        
        Economic and monetary union
        
        Common currency
        
        Convergence Criteria
        
        Exchange Rate: 2 consecutive years in ERM band without devaluation
        
        Inflation Rate: No more than 1.5% above level in the three member states with the lowest inflation in the previous year
        
        Long-Term Nominal Interest Rate: No more than 2% above the level in the thee member states with the lowest inflation in the previous year
        
        Government Deficit: No more than 3% of GDP in previous financial year
        
        Government Debt: No more than 60% of GDP in previous financial year
      - Inflation bias from home nation
    - - Original Countries: Belgium, France, Italy, Luxembourg, Netherlands, and West Germany
      - Focuses
        
        Increased European Communities
        
        Economic integration between members
  - - - ERM Crisis
        
        May break peg
        
        ERM Bands
        
        +/- 15% deviation
      - Fixed exchange rates
      - Basket of currencies (weighted)
  - - - Low-inflation environment
      - Sustainable fiscal policy
      - Political progression
    - - Addresses concerns with fiscal discipline once a nation has reached Eurozone member status
    - - No Fiscal Union
      - No Banking Union
      - Sovereign - Bank Doom Loop
      - Limited Lender of Last Resort
      - Labor Immobility
      - Exit Risk