Transcript Factors influencing ER - Warsaw School of Economics

The international monetary
system at present
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Lecture outline
 Flexible ER system after 1973
 The development of the international financial
market
 The development of euromarkets
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The IMS after 1973
 The basis of the present system
 Advantages and disatvantages of flexible
ER
 Speculation
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The first oil shock
 1973-1975
 Increase of the oil price  supply shock
 Wages and prices interdependence
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First oil shock
 Stagflation
 Economic policy- international shifting of
expenses
 Money supply increase in industrialized
countries
 Current account- surplus countries OPEC
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Changes on the financial markets
 Depreciation of USD - 1976-1979
 Political imbalance in international
economic relations
 1979- US monetary policy shifts
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The second oil shock
 1979-1980
 Inflation increase in importing countries
 Contractionary monetary policy in
industrialized countries
 Economic recession
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Recesion in the 80-ties
 Inflation decrease in industrialized
countries
 Large ER destabilization
 Frequent CB interventions
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Recesion in the 80-ties
 Fiscal expansion in the US
 The multiplier effect
 Constant appreciation of USD
 US BP deterioration
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Recesion in the 80-ties
 Protectionism
 „Benign neglect”  interventionism
 Coordination of exchange rate policy
- 1985
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Recesion in 80-ties
 Inflationary pressure at the end of the 80ties:
 UE
 USA
 Japan
 The ERM problem
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The 90-ties
A series of currency crises
 Counteracting ER crises
 A new element of the IMS- the euro area
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The IMS in ‘90/2000
 Global imbalance
 Export supporting strategy in China and
Japan
 Changes of the global reserves
structure
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The IMS in ‘90/2000
 Increase of international i%
interdependency
 Increase of the international savings flow
 New ER systems
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The IMS till 2005- an assessment
 International money supply
 Intenational liquidity
 Global equilibrium
 Framework for the national policy
 ER stabilisation
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Ocena działania MSW do 2005 r.
 Monetary policy
 IMS symmetry
 Adjustment mechanism
Coordination
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Monetary policy
 CB autonomy
 Reconciling the internal and external
equilibrium
 CB interventions
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IMS symmetry
 Assymetric roles of currencies
 The global reserve structure
 Symmetry vs. stabilisation
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Adjustment mechanisms
 Structural changes in the global economy
 The role of capital flow liberalisation
 Empirical verification
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International cooperation
stabilisation
 Coordination
 Destabilising speculation
 The impact on international trade and
investments
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The development of the
international financial markets
 Increasing liquidity
The role of derivatives
Growing role of capital markets
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Increased liquidity
Capital flow liberalisation
 Technological progress
New instruments and products
New risk managament techniques
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Increased role of derivatives
New risk hedging techniques
Basic and structurized intrument
Growing role of speculation
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Growing role of capital markets
Malejąca rola banków w pośrednictwie
finansowym
The bond market
The stock market
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Daily turnover on the FX market
4500
4000
3500
3000
2500
mld USD
2000
1500
1000
500
0
1992
1995
1998
2001
2004
2007
Source: BIS
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2010
Daily turnover on the derivatives
market
mld USD"
5000
4500
4000
3500
3000
2500
mld USD"
2000
1500
1000
500
0
1998
2001
2004
2007
Source: BIS
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2010
The development of euromarkets
The eurocurrency market
 The eurobonds market
 The eurostock market
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The eurocurrency market
 Eurocurrency- a deposit or a loan allocated or gained in
a specific currency beyond the territory of functioning of
this currency
 Main influence on the establishment of the marketeurodollars in the 50-ties
 Europound market, Eurofranc market, Euroeuro market
 Example:
 A deposit in USD in Tokyo
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Reasons for creation
 Supply side
 BP deficit in the USA
 i% spread between Europe and the US
 Occassionaly factors
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Reasons for creation
 Demand side:
 New way of using USD
 EU- integration processes
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How does it work?
 A German bank allocates a deposit at a US
bank  it can borrow the money to a French
bank
 The French bank may borrow this money to a
Japanese bank
 At the eurocurrency market the monetary
multiplier does not work !!!
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How does it work?
 The interbank market and beyond
 The borrowed moneyis not under the
jurisdictionof the CB
The need of sterilization
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The advantages
 Simple way of settling transactions
 Large liquidity
 An advantagous i% level
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The eurobonds market
 A bond issued in the national currency
which is traded outside the territory of the
national monetary jurisdiction
 The creation of the system- the 60-ties
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The eurobonds market
 Reasons for creation
 Income equalisation tax
 Spread of rates of returns between European and
US bonds
 12-15% of global bond issuance
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How does it work?
 Consortium
 Underwriters
Selling group
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Eurostocks
Securities which are issued by company
on foreign markets denominated in
another currency than the national
currency of the issuer
 Its creation-80-ties
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Summing up
 Floating ER after 1973
 The development of the financial markets
 The development of the euromarkets
 Global imbalances
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References

P. Krugman, M.Obstfeld, International economics: theory and policy,
Pearson, Addison Wesley, Boston 2009

Triennial Central Bank Survey, Foreign exchange and derivatives market
activity in April 2010, Monetary and Economic Department, Bank of
International Settlements, 2010.
P. Bożyk, J. Misala, M. Puławski, Międzynardowe stosunki ekonomiczne,


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PWE, 2002.
International banking and financial market developments, Monetary and
Economic Department, Bank of International Settlements, 2000
Offshore markets for the domestic currency: monetary and financial
stability issues, Workin Papers, Monetary and Economic Department,
Bank of International Settlements, 2010
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