(国际经济学英文课件)ch19Macroeconomic Policy and Coordination Under Floating Exchange Rates.ppt

Chapter 19 Macroeconomic Policy and Coordination Under Floating Exchange Rates Preview Arguments for flexible exchange rates Arguments against flexible exchange rates Foreign exchange markets since 1973 Interdependence of large countries The Chaing Mai Initiative for East Asian countries Introduction The Bretton Woods system collapsed in 1973 because central banks were unwilling to continue to buy over-valued dollar denominated assets and to sell undervalued foreign currency denominated assets. In 1973, central banks thought they would temporarily stop trading in the foreign exchange market, and would let exchange rates adjust to supply and demand, and then would reimpose fixed exchange rates soon. But no new global system of fixed rates was started again. Arguments for Flexible Exchange Rates Monetary policy autonomy Without a need to trade currency in foreign exchange markets, central banks are more free to influence the domestic money supply, interest rates, and inflation. Central banks can more freely react to changes in aggregate demand, output, and prices in order to achieve internal balance. Arguments for Flexible Exchange Rates (cont.) Automatic stabilization Flexible exchange rates change the prices of a country’s products and help reduce “fundamental disequilibria”. One fundamental disequilibrium is caused by an excessive increase in money supply and government purchases, leading to inflation, as we saw in the US during 1965–1972. Inflation causes the currency’s purchasing power to fall, both domestically and internationally, and flexible exchange rates can automatically adjust to account for this fall in value, as purchasing power parity predicts. Arguments for Flexible Exchange Rates (cont.) Another fundamental disequilibrium could be caused by a change in aggregate demand of a country’s products. Flexible exchange rates would automatically adjust to stabilize high or low aggregate demand and output, thereby keeping output closer to its normal level