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Balance ofPayments and

Exchange Rates

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UK balance of payments: 2001 ($ millions

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UK balance of payments: 2001 (! millions

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"he Balance of Payments #cco nt

• "he capital acco nt• "he financial acco nt

– in%estment

• di&ect• po&tfolio

– othe& financial flo's (mainly sho&t te&m

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• "he capital acco nt• "he financial acco nt – in%estment

• di&ect• po&tfolio

– othe& financial flo's (mainly sho&t te&m – flo's to and f&om &ese&%es

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•di&ect• po&tfolio

– othe& financial flo's (mainly sho&t te&m – flo's to and f&om &ese&%es – financial acco nt balance

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•di&ect• po&tfolio

– othe& financial flo's (mainly sho&t te&m – flo's to and f&om &ese&%es – financial acco nt balance

• %e&all balance of payments

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) RE*+ E,-.#+*E /#RKE"

• he&e fo&eign c &&encies a&e bo ght and sold (B expo&t $120 3 mil and

impo&t $1 11 mil4 se&%ices $1565 and $275 8 9ncome $25 and $11268Remittances $ 7

• /ain agents: Ban;s4 B&o;e&s4 money change&s etc<

• =o &ces of demand of fo&eign c &&ency

- 9mpo&t of goods and se&%ices4 b ying assets o& in%estment ab&oad4paying debt

- =o &ces of s pply

- Expo&t of goods and se&%ices4 &emittances4 in%estment at home4

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hat is Exchange Rate>

• 9t is the &ate of exchange bet'een t'oc &&encies<• (a + mbe& of home c &&ency pe& nit of

fo&eign c &&ency e

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1.00

1.20

1.40

1.60

1.80

2.00

2.20

0

$ p

r i c e

o f £

D by USA

Q of £

ete&mination of the &ate of exchange

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1.00

1.20

1.40

1.60

1.80

2.00

2.20

0

$ p

r i c e

o f £

Q S

S by UK

Q of £

ete&mination of the &ate of exchange

D by USA

Q D

b a

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1.00

1.20

1.40

1.60

1.80

2.00

2.20

0 Q S Q D

d $ p

r i c e

o f £

ete&mination of the &ate of exchangeS by UK

Q of £

c

D by USA

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Exchange Rates

• "he &ate of exchange – indi%id al &ates of exchange – exchange &ate index

• ete&mination of exchange &ates – the eA ilib&i m exchange &ate – app&eciation and dep&eciation

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Exchange Rates


• ete&mination of exchange &ates – the eA ilib&i m exchange &ate – app&eciation and dep&eciation – shifts in c &&ency demand and s pply

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

)loating exchange &ates: mo%ement to a ne' eA ilib&i m

€

£

S 1

D 1

Q of £

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

Q of £


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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


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Exchange Rates



• diffe&ences in inte&est &ates

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


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Exchange Rates



• diffe&ences in inte&est &ates• diffe&ences in inflation &ates

)l h l b

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


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Exchange Rates



• diffe&ences in inte&est &ates• diffe&ences in inflation &ates• &elati%e in%estment p&ospects

)l i h & % ' A ilib&i

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


h

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Exchange Rates



• diffe&ences in inte&est &ates• diffe&ences in inflation &ates• &elati%e in%estment p&ospects• change in agg&egate demand

)l i h & % ' A ilib&i

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


E h R

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Exchange Rates

•"he &ate of exchange – indi%id al &ates of exchange – exchange &ate index


• diffe&ences in inte&est &ates• diffe&ences in inflation &ates• &elati%e in%estment p&ospects• change in agg&egate demand• spec lation

)l ti g h g & t % t t ' A ilib&i

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0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

€

£

S 1

D 1

S 2

D 2

Q of £


E h R d B l f P

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Exchange Rates and Balance of Payments

•Exchange &ates and the balance ofpayments: no go%e&nment inte&%ention

– a floating exchange &ate

• ho' &ates a&e dete&mined by deale&s

– a tomatic balancing of o%e&all balance of

payments – c &&ent4 capital and financial acco nts may

not sepa&ately balance

E h R d B l f P

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•Exchange &ates and the balance ofpayments: go%e&nment inte&%ention – &ed cing sho&t te&m fl ct ations

• sing &ese&%es• bo&&o'ing f&om ab&oad• changes in inte&est &ates

– maintaining a fixed &ate of exchange o%e&

the longe& te&m• deflation @ &eflation• s pply side policies• impo&t cont&ols

Exchange Rates and Balance of Payments

)i d % & )l i E h R

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)ixed %e&s s )loating Exchange Rates

•#d%antages of fixed exchange &ates – ce&tainty – no spec lation (if &ate is absol tely fixed – p&e%ents Ci&&esponsibleC go%e&nment policies

• isad%antages of fixed exchange &ates – conflicts 'ith othe& mac&o obDecti%es – dange& of competiti%e deflations – p&oblems of inte&national liA idity – diffic lties in adD sting to shoc;s – spec lation

)i d % & )l ti E h R t

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)ixed %e&s s )loating Exchange Rates

•#d%antages of f&ee floating &ates – a tomatic co&&ection – no p&oblem of inte&national liA idity – ins lation f&om exte&nal e%ents – less const&aint on domestic mac&o policy

• isad%antages of f&ee floating &ates – possibly nstable exchange &ates

– spec lation – nce&tainty fo& b siness

• b t se of fo&'a&d ma&;ets – lac; of discipline on economy

"h &i i f th E &

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"he &igins of the E &o

•Post 'a& &eg lation of exchange &ates – the B&etton oods system – its collapse in the ea&ly 1 70s – di&ty floating

• "he ER/ – feat &es of the ER/ – the 1 60s

– c&isis in the ER/• e%ents of 1 2• e%ents of 1 3

– a &et &n of calm

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E & E i d / t & U i

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E &opean Economic and /oneta&y Union

• .o' desi&able is E/U> – #d%antages of a single c &&ency

• eliminating con%e&sion costs• inc&eased competition and efficiency

• elimination of exchange &ate nce&tainty• inc&eased in'a&d in%estment• lo'e& inflation and inte&est &ates

– isad%antages of E/U

• political a&g ments• adD stment to shoc;s

– p&oblem of asymmet&ic shoc;s• EU12 may not be an optimal c &&ency a&ea

• &egional p&oblems

*l b li ti d th P& bl f 9 t bilit

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*lobalisation and the P&oblem of 9nstability

•9nte&dependence th&o gh t&ade – inte&national effects of changes in

agg&egate demand

– % lne&ability of open economies

• )inancial inte&dependence

– si e of inte&national financial flo's

– inte&national effects of changes in inte&est&ates


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• "he need fo& policy co o&dination – the sea&ch fo& policy co o&dination

• *7@*6 meetings: attempts at ha&monisation• b t lac; of con%e&gence

• iffic lties in achie%ing ha&monisation – diffe&ences in b dget deficits and debt

– inte&est &ate di%e&gence – diffe&ent inte&nal st& ct &es of economies – politicians mo&e conce&ned 'ith domestic

iss es

ebt and e%eloping o nt&ies

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ebt and e%eloping -o nt&ies

• "he debt p&oblem

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ebt &atios: a%e&age of all de%eloping co nt&ies

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• &igins of the debt p&oblem – bo&&o'ing to finance de%elopment – the 1 73@5 oil shoc;

– the 1 7 @60 oil shoc;• 'o&ld &ecession fall in expo&t ea&nings• fall in commodity p&ices (expo&ts• high inte&est &ates cost of se&%icing debt

• Resched ling debt – &esched ling official loans – &esched ling comme&cial ban; loans


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• ealing 'ith debt – st& ct &al &efo&ms – 9/) st& ct &al adD stment p&og&ammes

• tight fiscal policies to &ed ce b dget deficits• p&i%atisation and ma&;et libe&alisation• open t&ade policy• ha&dship f&om 9/) p&og&ammes

– debt fo&gi%eness• .9P- initiati%e

– s ccesses @ fail &es to date

• p&ess &e to cancel debts

EW Bop 2

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Transcript of EW Bop 2