Transcript kj - University of Pennsylvania

#1. Introduction: International Financial Markets
1. History of International Financial System
2. Exchange Rates since 1973
Reading:
International Monetary System (Eun and Resnick
Chapters 1 and 2)
page 1-1
1. History of International Financial System
Bimetallism: Before 1875
Classical Gold Standard: 1875-1914
Interwar Period: 1915-1944
Bretton Woods System: 1945-1972
The Flexible Exchange Rate Regime: 1973-Present
Bimetallism: Before 1875
A “double standard” in the sense that both gold and silver
were used as money.
Some countries were on the gold standard, some on the
silver standard, some on both.
Both gold and silver were used as international means of
payment and the exchange rates among currencies were
determined by either their gold or silver contents.
Gresham’s Law implied that it would be the least
valuable metal that would tend to circulate.
Gresham’s Law
Suppose Gold and Silver were both used, when the
conversion rate is one ounce of gold = 15.5 ounces of
silver.
Suddenly, discovery of new gold mines causes huge
influx of gold into the market. Gold becomes much
cheaper to produce than silver is.
Producer will produce lots of gold, and everyone will use
gold.
Bad money (gold) drives out good money (Silver).
Classical Gold Standard:
1875-1914
During this period in most major countries:
• Gold alone was assured of unrestricted coinage
• There was two-way convertibility between gold and
national currencies at a stable ratio.
• Gold could be freely exported or imported.
The exchange rate between two country’s currencies
would be determined by their relative gold contents.
Classical Gold Standard:
1875-1914
For example, if the dollar is pegged to gold at
U.S.$30 = 1 ounce of gold, and the British pound is
pegged to gold at £6 = 1 ounce of gold, it must be
the case that the exchange rate is determined by the
relative gold contents:
$30 = £6
$5 = £1
Classical Gold Standard:
1875-1914
Highly stable exchange rates under the classical
gold standard provided an environment that was
conducive to international trade and investment.
Misalignment of exchange rates and international
imbalances of payment were automatically
corrected by the price-specie-flow mechanism.
Price-Specie-Flow Mechanism
Suppose Great Britain exported more to France than
Great Britain imported from France.
This cannot persist under a gold standard.
• Net export of goods from Great Britain to France
will be accompanied by a net flow of gold from
France to Great Britain.
• This flow of gold will lead to a lower price level in
France and, at the same time, a higher price level in
Britain.
The resultant change in relative price levels will slow
exports from Great Britain and encourage exports from
France.
Question: Guess whether inflation rate was high or low
during the gold standard…
Cumulative consumer price index
Bretton Woods System:
1945-1972
During the interwar period from 1914 to 1945,
exchange rates fluctuated wildly.
Bretton Woods system was named after a 1944
meeting of 44 nations at Bretton Woods, New
Hampshire.
The purpose was to design a postwar international
monetary system. The goal was exchange rate
stability without the gold standard.
In the same meeting, the IMF and the World Bank
were created.
Bretton Woods System:
1945-1972
Under the Bretton Woods system, the U.S. dollar
was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
Each country was responsible for maintaining its
exchange rate within ±1% of the adopted par value
by buying or selling foreign reserves as necessary.
The Bretton Woods system was a dollar-based gold
exchange standard.
Bretton Woods System:
1945-1972
British
pound
German
mark
French
franc
Par
Value
U.S.
dollar
Pegged at
$35/oz.
Gold
DEM (EUR)
JPY
GBP
page 1-13
Jul-08
Jan-07
Jul-05
Jan-04
Jul-02
Jan-01
Jul-99
Jan-98
Jul-96
Jan-95
Jul-93
Jan-92
Jul-90
Jan-89
Jul-87
Jan-86
Jul-84
Jan-83
Jul-81
Jan-80
Jul-78
Jan-77
Jul-75
Jan-74
Jul-72
Jan-71
2. Exchange Rates since 1973
450
400
350
300
250
200
150
100
50
Exchange Rate Classifications
( Source: Stanley Fisher, “Mundell-Fleming Lecture …”, IMF conference 2007 )
page 1-14
Example of a Crawling Peg
15
Bekaert and Hodrick
2008
An Example of a Peg with
Horizon Band (Target Zone)
16
Bekaert and Hodrick
2008
page 1-17
page 1-18
page 1-19
page 1-20
Course
This course is distinct from:
open economy macroeconomics
international trade
economic development
International corporate finance
Most class materials (lecture notes, problems) from
Professors Urban Jermann and Amir Yaron.
Timing issues
The schedule may change as the semester goes along.
We may spend more time on some topics and introduce
relevant news and research into discussions.
Exam 1: February 22 (6-8pm)
Exam 2: April 12 (6-8pm)
Guessing Game and Group Formation
Which exchange rate series’ are Indonesia’s,
Argentina’s, Canada’s & Brazil’s?
We use the exchange rate definition of the price of
foreign currency in dollars:
S($/FC)
Analogous to price of shoes: P($/shoe)
• Indonesia, Argentina, Canada &
Brazil
Measuring Exchange Rate Movements
A decline in a currency’s value is referred to as depreciation,
while an increase is referred to as appreciation.
% D in foreign currency value = (S - St-1) / St-1
A positive % D represents appreciation of the foreign
currency, while a negative % D represents depreciation.
Which currency?
Our email
Professor David Ng
([email protected])
Teaching Assistants:
Jennifer Grossman: [email protected]
Florian Hagenbuch: [email protected]
Qi Liu: [email protected]
Administrative Details
No class next Monday (Martin Luther King day
observed in Penn)
Textbooks
Eun and Resnick
Office Hours
Webcafe under FNCE 219
Groups
A bit about myself...
My Background
My Research Interest
.