Chapter 2 International Monetary System概要1.ppt

China’s Exchange Rate China maintained a fixed exchange rate between the renminbi (RMB) yuan and the U.S. dollar for a long time. RMB floated between 2005 and 2008 and then again starting in 2010. There is mounting pressure from China’s trading partners for a stronger RMB. RMB as a Potential Global Currency For the RMB to become a full-fledged global currency, China will need to satisfy these conditions: Full convertibility of its currency. Open capital markets with depth and liquidity. The rule of law and protection of property rights. The United States and the euro zone satisfy these conditions. The Argentinean Peso Crisis In 1991 the Argentine government passed a convertibility law that linked the peso to the U.S. dollar at parity. The initial economic effects were positive: Argentina’s chronic inflation was curtailed Foreign investment poured in As the U.S. dollar appreciated on the world market, the Argentine peso became stronger as well. The Argentinean Peso Crisis The strong peso hurt exports from Argentina and caused a protracted economic downturn that led to the abandonment of peso–dollar parity in January 2002. The unemployment rate rose above 20 percent The inflation rate reached a monthly rate of 20 percent The Argentinean Peso Crisis There are at least three factors that are related to the collapse of the currency board arrangement and the ensuing economic crisis: Lack of fiscal discipline Labor market inflexibility Contagion from the financial crises in Brazil and Russia Currency Crisis Explanations In theory, a currency’s value mirrors the fundamental strength of its underlying economy, relative to other economies, in the long run. In the short run, currency trader expectations play a much more important role. In today’s environment, traders and lenders, using the most modern communications, act on fight-or-flight instincts. For example, if they expect others are about to sell Brazilian reals for U.S. dollars, they want to “get to the exits first.”