IPE QUIZ 3

Value of Currency in short term: Undervalued Currencies

Undervalued currencies attract foreign investment. Undervalued currencies help a country export yet make imports more expensive (assets are cheaper) and improve trade deficits. EX: the United States complains that China's undervalued currency makes Chinese imports inexpensive for consumers.

Current Account

a country's exports and imports of good. Four aspects: merchandise trade, services trade, primary income (interest and dividends), secondary income (transfers)

Financial Account

all movements of financial capital in and out of a state.

Capital Account:

smaller than the other two; consists of specialized payments such as debt forgiveness, and the transfer of goods and financial assets by migrants entering or leaving a state.

Policy Trilemma Basics

states cannot maintain all three: •Sovereign monetary policy (interest rates, volume of dollars) •Fixed exchange rates •Free capital flows Option (a): A stable exchange rate and free capital flows (not independent monetary policy, setting domestic interest rate apart from the world undermines a stable exchange rate thru appreciation or depreciation pressure on the currency). Option (b): An independent monetary policy & free capital flows (not stable exchange) Option (c): A stable exchange rate and independent monetary policy (but no free capital flows, which would require the use of capital controls or currency reserves).

Replacing one currency with another

the adoption of the Euro or El Salvador's adoption of the U.S. dollar

WEEK 7: International Monetary Relations

• Within countries, there is often conflict over monetary policies. • Between countries, monetary relations are central to a functioning global economy. Stable relations among various national currencies allow traders and investors to make long-term plans with confidence.

Exchange Rate Regimes

•1970s transition from fixed to flexible exchange rates. BW system of fixed rates + increasing trade => domestic constraints US as both reserve and exchange currency + outflow of US $ (Marshal plan, trade deficits, Euro Petro Dollars funding 3rd world debt) => need to adjust or delink $ from gold 1971/3. •Gilpin argued that for the first time since WWII, currency markets and financial markets began to comingle. (Polanyi?) Changes in exchange rate affect financial gains and vise versa, also comingles states monetary policies effects. It turns out that this comingling allows for a flexible exchange regime.

The Impossible Trinity

•AKA The Policy Trilemma Impossibility of nation to maintain more than two of three policy goals: 1.Monetary independence 2. Exchange rate stability 3. Financial integration

Current Account Balance

•AKA: Balance-of-payments ~ records debt and credit transactions of residents, firms, and governments of a state in a year.

Floating Rates 1914-44

•Attempts to reestablish the gold standard were unsuccessful in the face of damage from the war and the Great Depression. •The resulting floating system led to great instability and political extremism. •In 1944, representatives of 44 countries met at Bretton Woods to negotiate monetary system. The new system provided stability to currency values. Crafted by the United States, the post-World War II regime fixed the dollar to gold ($35/ounce) and all major currencies to the dollar. Countries could devalue their currency relative to the dollar (discouraged). Because currency markets are prone to failure, the IMF was created to lend countries in crisis funds to buy and thus appreciate depreciated currencies.

International Monetary Regimes, 1870-Present Cont.

•Classic Gold Standard as a fixed exchange rate regimes •Created, in theory, a self-regulating international monetary order •External imbalances - current account balance deficits or surpluses - would be automatically corrected by domestic wage and price adjustments Price-species-flow mechanism •Relied on states to "play by the rules" Adjust interest rates and tighten monetary conditions

International Monetary Regimes, 1870-Present cont.

•Collapse of the highly integrated global financial and monetary order by 1914 •Some argue it fell apart due to decline of British hegemony HST argues that it takes a strong hegemon to construct international monetary order / gold standard •Others see the domestic political forces undermining the order as states were increasingly required to respond to domestic democratic pressures

Currency Collapse

•Currency crises occur when the value of a currency collapses. When government exchange rate commitments are not credible. •How they unfold: The government fixes the exchange rate (e.g., $35 = one oz. gold). Economic and political developments make this commitment costly (e.g., U.S. war in Vietnam -> defense spending; Nixon didn't want hands tied on spending to maintain parity value of the $ to gold.) Investors begin to sell the currency -> currency forced to devalued. Instead of reining in spending, Nixon severed the dollar-gold connection to maximize his autonomy.

US dollar

•Established after 1945 when the US was overwhelmingly the dominant economy in the world with a share of global output of 28 % •Dollar as lead currency w/ 75 % of world GDP currencies anchored to it. •America's share of global output has declined to 18 % and in the 1970s the share of global GDP anchored to the dollar fell to 45 %. •Since the 1970s the share of currencies anchored to the dollar increased, reaching 75 % again in 2015. Post - 2008 US $ as reserve increased, as did T-Bill sales •Era of a 'second Bretton Woods', created not by design but by the unilateral anchoring of other currencies to the dollar.

The Impossible Trinity Example:

•Estonia, Latvia, and Lithuania had substantial debts in foreign currencies. •When the '08 financial crisis hit, all 3 kept their currencies pegged to the euro -> significant economic pain. •Poland and the Czech Rep. had less debt and remained unpegged to the Euro. Poland devalued by over 40 percent and the Czech Republic by over 20 percent. •Monetary flexibility reduced the econ pain of the crisis, both have yet to adopt Euro

The Impossible Trinity Cont.

•Few nations face the clear-cut Trilemma options •Instead, they chose the degree of financial integration and exchange rate flexibility Similar effects and outcomes exist Increasing one Trilemma variable induces a weighted drop in the other two variables

Currency Exchange Markets

•Foreign exchange markets run on supply and demand •Floating currencies adjust the price based on demand •Fixed or pegged currencies require the state to adjust the supply to maintain the price Pressure on the price will build through the 'carry trade' if there is an imbalance between supply and demand •This means the choice of an exchange rate regime is based on a number of factors. Mexico's fixed regime was forced to adjust in the 1994-95

The Gold Standard Controversy

•In the 1890s, the United States was in recession. •Pullman railroad strike: workers strike over low wages and poor conditions. •In 1894, unemployed workers marched on Washington. •William Jennings Bryan argued for going off gold standard in hard times. The Silverites, a faction of the Democratic Party, claimed unlimited coinage of silver would solve the problems by injecting money into the economy. Farmers and small-business owners (debtors) from the West and South tended to agree. The wealthy northeastern industrialists (creditors) battled to keep the gold standard in place. •Similar logic was at play in the Eurozone crisis. (QE ?)

Currency Crisis: Mexico

•In the mid-1990s Mexico suffered a crisis due to its finances and its currency regime Major restructuring due to 1980s debt -Joined NAFTA and committed to liberalization, with massive FDI into Mexico - had fixed exchange rate and capital mobility Political events destabilized the government - Chiapas rebellion and assassination of Presidential candidate Colosio Massive selling of Peso => declining US $ reserves (from $28 B to $6.5 B in 10 months) => float of Peso =>devaluation (40%)/inflation US government eventually became the lender-of-last resort (?)

Foreign Dollar Reserves:

•Increasing exposure to instabilities => EM's increased foreign reserves •Reserves/GDP ratio of developing nations increased from 5% to 27% •Asian reserves/GDP increased from 5% 1980 to 37% 2006 (China 41%) •Increased financial stability & independence of monetary policy

Currency Collapse + IMF

•International cooperation can stabilize currencies & arrange bailouts. •The IMF and EU have played important roles in such efforts. •However, there are also costs to cooperation. In 2011, Greek government announced its deficit was far larger than expected. As a member of the EU, Greece did not have a national currency to manipulate in the face of the growing financial crisis. The EU pressed Greece for severe austerity measures in exchange for bailout. Greeks engaged in mass protests and urged exiting the euro. Domestic opposition can also make cooperation difficult. So-called IMF riots can be politically destabilizing. The Greek government fell over the 2011 financial crisis.

What do Current Account Deficits Mean?

•Its debt to GDP level is not near the highest •US foreign subsidiaries mask its true account balance •Has had higher deficits when high productivity growth (?) •US attracts investments •Triffin Dilemma - US debt allows US as global currency Dollarization

MMT

•MMT - "The government does not 'need' the 'public's money' in order to spend; rather the public needs the 'government's money' in order to pay taxes. Once this is understood, it becomes clear that neither taxes nor government bonds 'finance' government spending." (Wray 1998) • "why should the government take from the private sector the money . . . that it alone is capable of creating?" (Kelton 1998) •Since there is a risk that too much government spending would spark inflation, the government might need to cool things down, meaning create a recession — though Wray shies away from using the word — by raising taxes. Taxes, MMT holds, should be used as tools of economic management, but must never be thought of as "funding" government.

Managed Float: 1973-present

•Now, major economies loosely coordinate their currencies and macroeconomic policies, through the G-7 or G-20. •Generally, there is stability among the major currencies, but less for currencies among smaller & poorer countries. •There is increased volatility in the value of the dollar under a managed floating exchange rate system. During this period, the major innovation in the exchange rate regime has been the creation of the euro.

Who favors fixed or pegged rates

•Provide a monetary anchor that keeps prices stable. Investors benefit from less exchange-rate risk. Stability helps long-term investments Borrowers, who may have borrowed in foreign currencies. Groups engaged in trade. Stability provides confidence to engage in trading relationships Groups concerned about inflation. e.g.,: Germany in the 2015 Eurozone crisis.

More on Monetary Policy:

•Rests on modern banking system History of banks emerging out of goldsmith shops who issued receipts and would make loans based on gold deposits -Banks loan out more than their deposits •Bank 'T account' is used to track fractional reserve process -Balance sheet where assets (deposits held and loans due to bank) and liabilities (deposit amounts loaned out) are registered

Currency Collapse Cont.

•Speculative attacks on currencies have been more frequent in recent years. •Cases: - Europe 1992 - Mexican peso crisis - Asian financial crisis - European crisis 2011

Choice of Exchange Rates Regimes and Currency Policies

•The Argentine government's 1991 pegged exchange rate for the Argentine peso to the U.S. dollar -> economic problems. •When the Argentine government devalued the peso in 2001, home mortgages denominated in US dollars saw the value of their debt triple compared to their salary (in pesos) in just two months. •By 2001, millions of Argentines faced significant hardships & mass protests erupted.

Bretton Woods 1944-73

•The Bretton Woods monetary system collapsed in the early 1970s when the United States refused to make the painful concessions necessary to keep its international commitment. •In 1973, President Nixon was spending increasingly on Vietnam War. •Currency speculators launched a number of attacks on the dollar. •They did not believe that the U.S. commitment to keep the $35 per ounce of gold was credible. •Nixon unilaterally announced that he was abandoning the peg, leading to the collapse of the Bretton Woods monetary regime.

Maintaining the value of currency through state intervention:

•To maintain the value of its currency, a country intervenes in the currency market. If currency appreciates, the country can issue more of it, depressing its value. If currency depreciates, the country can use foreign reserves to purchase currency (reduce volume), raising its value.

Federal Reserve System:

•US Central Banks created in 1913 12 Federal Reserve districts owned by the member commercial banks as shareholders It is a public-private partnership (?) -Seven Governors (elected by bank board members) -Chair of Board of Governors (appointed by President) Current Chair of Fed is Jerome Powell (2018) Followed Janet Yellen (2014), Ben Bernanke (2006), Alan Greenspan (1987), Paul Volker (1979)

US Current Account Deficits

•US has highest level of external debts (borrows from external sources to pay budget deficits/cover CA deficits)

Reserve Ratio

•central bank regulation that sets the minimum amount of reserves that must be held by a commercial bank. e.g., a reserve ratio of 20% means banks must reserve 20% of deposits. -A 20% reserve ratio on $100,000 will create $______ bank money? 1st bank can loan out $80,000 to person x who takes it to 2nd bank, who can loan out $64,000, 3rd bank can loan out $51,200..... -What about 10% or 5% reserve ratios? What are the risks of this system?

Costs to Fixing Exchange Rates

•eliminates a state's ability to have its own independent monetary policy. The government loses flexibility for adjusting to changing economic circumstances. Government cannot lower interest rates to stimulate consumption or combat recession. In 2015, the Greek people voted against austerity; they felt they were suffering from the euro straightjacket.

Quantitative Easing

•expansionary monetary policy where a central bank buys government bonds or other financial assets from banks to stimulate the economy by increased liquidity. •Used to increase inflation (?) Used when inflation is very low or negative, and standard expansionary monetary policy has become ineffective (interest rates). •In the US, ECB (APP, EAPP), UK (QE), Switzerland (QE), Japan (QE)... •US held $4.5 trillion in assets in 2014 20% of US GDP; ECB held 30% of GDP by 2017

International Monetary Institutions:

•help facilitate interaction. -The Bretton Woods monetary system and the European Economic and Monetary Union created rules for international cooperation in international monetary policy. The rules can also lead to conflict, as we saw in the showdown between Greece and the EU in the summer of 2015

Fractional Reserve Banking

•system where a fraction of bank deposits are backed by cash in deposits. -Most deposits are loaned out Used to expand the economy, freeing up capital to be loaned out. - Banks create 'bank money'

Current Reserve Ratios

•under $16.3 million in bank 0%; 16.4-124.2 million 3%; over 124.2 million 10%. •Adjusting the reserve rate can influence inflation ($vol) -As rate is lowered, multiple-expansion of money is increased

Currency values respond to several conditions

◦National interest rates ◦Current account ◦Prices of major exports ◦Instability and expectations

Technological Change

-1st neglect of the sources of this shift in state-market balance of power is the accelerating pace of technological change. -Strange claims the dynamism of technological change privileges markets over states (?) Media technology Productive technology Logistics and distribution technology ?????

Technological Change Cont.

-2nd neglect is failure to politically analyze the role of finance in shifting the balance of power away from states Structural shift from labor intensive to capital intensive production increases the power of finance. Requirement for large quantities of mobile capital -Under theorized politics of credit-creation and expansion. Finance technological innovation, production of technology, and consumption of technology.

Currencies Preferences: Costs and Benefits involved with weak or strong currencies: Strong

-A strong currency relative to others' increases your purchasing power. -Exports are less attractive to foreigners, more expensive for them.

The Impossible Trinity: Developed Countries:

-After Bretton Woods => reduced exchange rate stability -Decline in monetary independence

Hyperglobalization Thesis

-Against this approach is the hyperglobalization thesis - due to the pressures of globalization all states are converging around a single type. The pressures of the global market will produce institutional homogeneity over time as capital remakes state forms.

Cox Cont.

-Argues that structural power has been shifted form states to markets. Occurred through states, although it has eclipsed them. (?) Posits that the US used its structural power to lock Europe, Latin America and Asia into an open world market. But the US didn't intend for them to become competitive w/ US Is it beneficial to think of global markets as a form of structural power?

Service Trade Balance Examples:

-China deficit $116.39 billion (US) in 2013 -Germany deficit $63.52 billion (US) in 2013 -US surplus $225.28 billion (US) in 2013

Financial Account Balance Examples:

-China surplus $232.15 billion (US) in 2013 -Germany deficit $325.75 billion (US) in 2013 -US surplus $367.56 billion (US) in 2013 -A nation's current, financial and capital accounts, statistical discrepancy, and change in reserves always equals to zero -Currency reserves (- is growth) offset current accounts balance

Merchandise Trade Balance

-China surplus $351.77 billion (US) in 2013 -Germany surplus $275.87 billion (US) in 2013 -US deficit $701.67 billion (US) in 2013 -The US has had merchandise trade deficits since 1971 Dollar diffusion (Seagull) or Dollarization (Triffin Dilemma)

Current Account Balance Examples:

-China surplus of $182.81 billion (US) in 2013 -Germany surplus of $251.80 billion (US) in 2013 -United States deficit of $400.25 billion (US) in 2013

Cox

-Cox's understanding starts with production Production creates resources that can be turned into forms of power - financial, administrative, ideological, military and police. These construct authority (?) through the system of accumulation. When production structures are global so is exploitation potential. -Politics of the system of states: role of dominant state, and the global production structure. -Production, international political system of states, & world order. Brings in the power of production systems and their relationship with states and the system.

Internal Adjustment Measures: Domestic Groups pay the adjustment costs

-Deflationary monetary and fiscal policy to slow business activity -Decreasing of government deficits -Higher taxes and interest rates reduce spending

Money's stability, value, and role are affected by:

-Domestic interests Specific economic sectors favor weak currency, others favor strong currency ----Consumer/worker interests based on prices & wages, interest rates & inflation

The Impossible Trinity: Emerging Markets

-Even mix of trilemma options EM's => flexible exchange rates more than non-EM's Large foreign currency reserves •Non-emerging markets: No clear pattern across countries

The Impossible Trinity: Under Floating exchange rates w/open financial flows:

-Expansion of domestic money supply reduces interest rate => capital outflows in search of higher yields -Excess demand for foreign currency depreciates the exchange rate => increased export competition -Give up exchange rate stability

The Impossible Trinity: Under Closed Financial Systems

-Gain exchange rate stability and monetary independence -Closed financial system prevents arbitrage, delinking domestic interest rate from foreign interest rates -Central bank can control the supply of money and therefore the interest rate -Monetary independence traded for financial integration

Monetary Policy

-Government changes to the money supply or volume -Central banks use monetary policy to expand or limit funds for spending purposes and making such funds more expensive -Raising interest rates to make borrowing more costly -Decreasing the amount of money available for loans by increasing bank capital reserves - Selling government bonds to withdraw money from the economy -Buying government bonds to increase money supply

Example of retreat of the state

-Growth of TNCs (MNCs) as one example Not as 'powers behind the throne' directing or capturing states. -Instead, as increasing power accrued through production In production MNCs act as technical and organizational innovators, as decision makers of how and what will be produced and consumed States superintended the rise of global market authority (?) States + MNCs reorganized production and with it power: FDI, privatization, relocation of production, managing labor relations, tax policy and state debt, monetary goals, liberalized capital....

Hay + Global Convergence

-Hay asks the question: Is globalization to blame? Differentiates between: -Globalization of politics - displacement of political capacities and responsibilities from the national to the global level through the development of institutions of global governance -Politics of globalization - politics of the process of globalization, the political drivers of and the consequences of these processes on political conflicts, practice, and distribution of political responsibility.

Store of Value

-Helps preserve purchasing power or wealth in the private sector -Stores value by governments in official foreign exchange reserves

Who favors Floating Rates?

-Industries competing with foreign firms; devaluation increases price competitiveness. -Those with fewer links to the global economy. See no reason to suffer the sacrifice needed for a pegged rate. -Labor and others; full employment through countercyclical macroeconomic policies preferred to pro-cyclical pegged regime. -Floating rates provide freedom for independent monetary policies Permit adjustment to changing conditions, can still be quite volatile. Volatility in exchange rates increases risks for investors.

Research Cont.

-Japan's per capita GDP has been rising, but that's only because the population is declining and the workforce too. Personal disposable income has not risen as fast as the economy as a whole in many years—at 1 percentage point less than average GNP growth in the late 1980s. Japan may have 'full employment' but the percentage of the workforce employed on a temporary or part-time basis is up from 19% in 1996 to 34.5% in 2009, together with an increase in the number of Japanese living in poverty. According to the OECD, the percentage of people in Japan living in relative poverty (defined as an income that is less than 50% of the median) from 12% of the total population in the mid-1980s to 15.3% in the 2000s. Iwata's answer to Japan's 'secular stagnation' is to continue with government deficits and spending, but this time financed by just printing money, not issuing bonds. "Fiscal and monetary policies need to work as one, so that more money is spent on fiscal measures and the total money going out to the economy increases as a result," That's the only remaining policy option because "the BOJ's current policy does not have a mechanism to heighten inflation expectations. We need a mechanism where money flows out to the economy directly and permanently." BoJ bond purchases are just not working, because the banks are hoarding the cash in deposits and reserves and not lending. They must be by-passed, says Iwata. This proposal resembles the idea of "helicopter money" - a policy where the central bank directly finances government spending by underwriting bonds. Iwata's solution to low growth and weak real incomes is just one more variant of the idea that demand must be stimulated to get a capitalist economy going, in this case by just printing more money.

Political Import

-Mark Blyth called the drive towards neoliberal policies across the political spectrum in advanced economies cartelization. -Limits of catch-all politics lay in state fiscal constraints + shift to media over organizing = end of catch-all (heightened interparty competition) -Globalization as overstated and states have more room for maneuverability than portrayed. -Nevertheless, politicians believed and acted as if the constraints were real. -The outcome is the cartelization of political parties under neoliberalism. -"The embrace of a rhetoric of globalization by social democrats enabled them to survive the 1980s by cartelizing the policy space available to them. By doing so they successfully competed with the right and lowered their own costs of defeat, but at the cost of narrowing the choices available to the electorate."

Social Role of Money

-Money is the ultimate social construction. -For it to work, everyone must recognize and agree that it will serve in financial transactions without significant loss of value -Money is created by governments and subject to political influence.

Medium of Exchange

-Money serves important social functions as a medium of exchange. -Must be accepted as payment for goods, services and assets.

The Impossible Trinity: Under fixed exchange rates w/ capital mobility:

-Nation must intervene in the currency market to satisfy demand for foreign currency -Central bank sells foreign currency to the public, buying back domestic currency -The central bank loses control of the money supply Passively adjusts to the money demand e.g., Gold standard = fixed exchange rates w/ free movement of capital

Currencies Preferences: Weak compared to others

-National produced goods are less competitive. ---Domestic farmers and laborers who produce for domestic market, and domestic producers who export on world markets favor a weaker currency. -Export-promotion strategy favor weak currencies vis-à-vis foreign markets.

3 Premisis Cont.

-Posits that power is broader than most recognize. What about the power to advantage some priorities over others? -Economics made a turn toward rationality absent power. Bounded rationality doesn't account for real distribution of power. What is economic power and do some actors have more? -IR/IPEs obsession with hegemony This fails to account for hierarchy that exists within the hegemony. Economic problems due to US hegemonic decline or simply bad policies and decisions or is it actually working as designed?

Globalization and Voting Behavior

-Research has revealed globalization's influence on voting behavior. -Trade shocks relate to a decline in unimodal towards bimodal voting distributions (pol extremism). -We can see the structural power of globalization on states, along with the effect it potentially has on voting behavior. -Or perhaps voting behavior reflects states responses to the structural pull of globalization?

Universal Equivalent

-Stands in for exchange of socially equal valued goods -How can we have socially equal value between different goods?

Colonized the State

-Study of politics has been colonised by the state. Two conceptual problems: 1.Separation of domestic and international politics 2.Failure to account for relationship of politics & econ Solution: extending the definition of politics beyond states to all sources of social authority, allowing the power and relationship between states and markets in.

Retreat of the State

-Susan Strange revolutionized the study of IPE Retreat of the State (1996) based on work from over a decade. -In this study she argued political power was shifting from states to 'structural power' of the economy. -She rethinks four key axes of IR: 1. The limits of politics as a social activity 2. The nature and sources of power in society 3. Necessity and indivisibility of authority in markets 4. Anarchic nature of international society and states as the most important actor

Money's stability, value, and role are affected by #2:

-The country's role in the global economy Import and export competitivness -Global basis of money Fiat currency and Seigniorage right of US -The country's interaction with international institutions International Institutions: IMF, EMU/EU, ...

Retreat of the State Cont.

-Thesis is that over the postwar period markets have become more powerful than states. -Argues a decline in state authority over society and the econ -The market as disguised from many in modern politics because it appears like the state is more involved in peoples lives than in the past. (Bretton Woods era => today?) -Capital mobility hypothesis (CMH) - Financial integration increases costs of pursuing divergent monetary objectives, resulting in structural incentives for monetary adjustment.

VOC + Global Convergence

-VOC sees LME's and CME's responding to the pressures of global market integration in different ways based on their particular institutional strengths and weaknesses. -"Because of comparative institutional advantage, nations often prosper, not by becoming similar, but by building on their institutional differences" (Hall and Soskice, 2001:60) -Particularly important institutional heterogeneity: Industrial relations Vocational training and education Corporate governance

Global Convergence

-Varieties of Capitalism (VOC) (Hall and Soskice; Coates) Against the globalization thesis (CMH) - capitalism is converging to one common form due to structural pressures of globalizing capital. Claims at least two distinct paths due to divergent institutional forms and state capacities. -Two distinct types of capitalist economies/states: Liberal market economies (LMEs) (e.g., U.S., U.K., Canada, Australia, New Zealand, Ireland) Coordinated market economies (CMEs) (e.g. Germany, Japan, Sweden, Austria).

Deficits

-cause more severe pressure to adjust in the short term Liabilities increase which can lead to depleted monetary reserves (US?) -Two options: 1. Finance the debt Deferring the (political) costs of adjustment by borrowing 2. Adjust to it: Carry political risks as social groups bear the adjustment costs

Government Responses to Current Account imbalances: Surpluses

-cause pressure to adjust in the longer term Force up the value of its currency, making its exports more expensive for foreigners and raising domestic prices

Capital Mobility Hypothesis CMH

-financial integration has increased the costs of pursuing divergent monetary objectives, resulting in structural incentives for monetary adjustment.

External Adjustment Measures

-imposing costs on other states (beggar-thy-neighbor) -tariffs, import quotas, export subsidies, currency devaluation -Used to decrease imports and foreign investment outflows and increase exports and foreign investment inflows. -Can lead to competitive currency devaluations

Commercial Policy

-increase exports/decreasing imports (CA deficits); stimulate domestic market (CA surplus) Trade deals, -Tariffs, Export subsidies, R & D Investment

Fiscal Policy

-lowering or raising taxes and expenditures. Keynesian counter-cyclical spending to overcome -low-level equilibrium trap Lowering government spending (austerity) and raising taxes reduces -EX) purchasing power of the public (response to CA deficits)

Quantity Theory of Money

-price level is determined by supply of money in reference to demand for it. -Potentially volatile nature of fractional reserve system => regulations and use of rate by Central -Banks as monetary tool Is inflation really an issue for the US in today's IPE?

Monetary Policy Tools to the Fed:

-•Price stability as guiding principle under monetarism -Setting the Reserve Ratio -Federal funds rate - overnight interest rate given to banks (LIBOR UK) -Although the FED only adjusts short-term rates, this influences all rates -Strong relationship between interest rates and currency demands -Open market operations - buying and selling of securities T-Bills/MBS -Discount window - Fed loans to depository inst. @ 1% over fund rate -Sets margin rates on stock purchases - dictates the amount down

4 Phases of Chinese Exchange Rate Policy:

1) depreciation 1979-942) 2) float 1994-953) 3)hard peg 1995-20054) 4) crawling peg 2005-

Federal Reserve Bank Functions:

1. Assist in clearing of checks between banks 2. Hold reserve accounts of member banks 3. Manage an account for the U. S. Treasury 4. Issue bank notes 5. Carry out the monetary policy promulgated by the Board of Governors and its Open Market Committee 6. Inspect member banks to make sure that they are operating prudently and legally (expanded to all savings and loan inst.) 7. Carry out important research on the economy

Four Main Functions of Money

1. Medium of exchange 2. Unit of account 3. Store of value 4. Universal equivalent

Third Proposition + Technological Change

3rd proposition- some fundamental state responsibilities are going unmet. Deregulation or self-regulation Growth of market discipline Growing realm of non-authority or 'ungovernance' "At the heart of the IPE is a vacuum" One study of the G7 found a significant shift after BW away from external management of independent policy to internal coordination toward single policy (Webb, 1999)

Choice of Exchange Rate Regimes

Devaluation ~ when a state lowers its currency's official price Revaluation ~ when it raises the official price Depreciation ~market-driven reduction in a currency's price Appreciation ~ market-driven increase in its price

Exchange rate regimes or mechanisms:

Floating (flexible) The global market sets the price of money relative to other monies

The Gold Standard Controversy Cont.

L. Frank Baum, who wrote The Wonderful Wizard of Oz, was a Kansas farmer hurt by the gold standard. The gold standard hurt farmers As grain prices on world markets declined, the farmers were less able to repay debts to banks. In the book, the yellow brick road represented the gold standard; the Scarecrow, a farmer; the Tin Man, industrial labor; Dorothy was a naïve American; the Lion was William Jennings Bryan; and the Wizard (McKinley) represented finance. When Toto pulled back the curtain, the Wizard was finally exposed as a fraud.

Soft Pegged

Managed floats or fixed to a basket of currencies with special adjustments

Overvalued Currencies:

Overvalued currencies boost consumer purchasing power abroad yet may lead to trade deficits.

Unit of Account

Place's value or price on goods, services, or assets

Research

The US government owns 38% of federal debt, US investors own 33%. About 29% is owned by foreign investors, primarily foreign central banks which use it to stabilize their own currencies against the dollar. About 1/20th of federal debt was loaned out to students at about APR+6%. -I compared debt servicing costs (Treasury) against tax receipts (CBO) and found that debt servicing costs as a share of revenue have declined ~38.8% since 1991, and ~38.6% as a percent of total outlays. In other words, "the portion of the current budget dedicated to debt service" has been trending down for 30 years. Recently the former deputy governor at the Bank of Japan Kikuo Iwata argued that Japan must ramp up fiscal spending with any increased public sector debt bankrolled by the central bank. This ex-governor seems to have adopted Modern Monetary Theory (MMT), or at least a version of Keynesian-style deficit spending as a 'radical' (or is it desperate?) answer to the continued failure of the Japanese economy to grow anywhere near its pre-global crash rate. The very latest data on the Japanese economy make dismal reading. The best measure of activity in manufacturing, the Nikkei manufacturing PMI, declined to 48.5 in February 2019, the lowest reading since June 2016, as both output and new orders declined at faster rates. Meanwhile, business confidence weakened for the ninth straight month. In Q4 2018, Japan's national output stagnated. There has been zero growth compared to the end of 2017. That compares with average annual growth of 2% since the 1980s. Iwata was originally the architect of the BOJ's massive bond-buying programme dubbed "quantitative and qualitative easing" (QQE). This was supposed to boost the economy through a massive injection of money supply. But although the Japanese government continually ran annual government budget deficits, it was to no avail in reviving nominal GDP growth or real household incomes.

International Monetary Regimes, 1870-Present

The classical gold standard, 1870-1914 • Great Britain adopted the gold standard in the 1820s others followed By 1870, every important economy was on the gold standard. Leading financial centers—government and private investors—cooperated to keep countries on the gold standard. Each individual currency had a specific fixed exchange rate in relation to gold Countries held their official international reserves in gold and were committed to exchanging their currencies for gold • Burdens fell on the politically weak. The burden of the gold standard falls largely on commodity exporters, labor and the poor, who had little political voice at the time.

Pegged (fixed)

The government promises to hold the value of its money stable to another currency or to gold

END OF WEEK 7: RESEARCH Cont

The latest version of this comes from the IMF. Having tried quantitative easing, as in Japan and elsewhere, and then 'negative interest rates' (ie people get paid to borrow money) to boost economies, the idea now is devalue cash. This is how it goes: "In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy. One option to break through the zero lower bound would be to phase out cash" How? Make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash. The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. Shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits. "This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash." This IMF idea comes hard on an actual attempt by a government to 'devalue' cash. Two years ago, the Indian government under Modi overnight abolished high-denomination banknotes. The government claimed the aim was to flush out ill-gotten gains by rich Indians hiding their earnings in cash to avoid tax. But it was the Hindu poor, in the rural areas particularly, who were most hit by this 'demonetisation'. Two-thirds of Indian workers are employed in small businesses with less than ten workers - most are paid on a casual basis and in cash rupees The demonetisation was supposed to attack corruption and tax evasion, but it seems to have had little effect on that. Indeed, lots of rich Indians made 'private arrangements' to obtain new bank notes and avoid having to declare monies into bank accounts.. Getting out of a recession or depression by printing money or reducing the value of holding cash has long been a Keynesian-style idea. Keynes himself was very keen on the ideas of Silvio Gesell, a German merchant, who was minister of finance in the revolutionary government of Bavaria in 1919. Gesell was convinced that the problems of capitalist depressions like the one in the late 19th century were due to the high interest rate on borrowing. This encouraged 'hoarding'. If that could be stopped, then money would flow into spending and depressions would be overcome. Gesell's main policy proposal to end slumps was stamped money. According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. Keynes commented: "The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale." The idea was to devalue cash and force people to spend and thus raise 'effective demand' by breaking the 'liquidity trap' of money hoarding.

START OF WEEK 8: Gidron and Hall (2017)

The relative social status of men without a college education circa 1990 and 2014

3 Premisis of Retreat of the State

Three premises: 1. Politics is a common activity, not confined to the politicians or states. 2. Power functions in impersonal ways through markets. 3. Authority in society and over economic transactions is often exercised by agents other than states.