ch14balanceofpayments adjustments under fixed exchange rates(国际经济学浙江林学院,岑丽娟)

1、International EconomicsBy Robert J. Carbaugh8th EditionChapter 14:Balance-of-Payments Adjustments Under Fixed Exchange RatesBalance of payments adjustmentsBalance of payments adjustmentsIf part of the balance of payments is in deficit or surplus for a period of time, mechanisms are needed to restore

2、 equilibriumAdjustment mechanisms can be:Automatic - economic processesDiscretionary - government policies2Balance of payments adjustmentsAutomatic adjustment under fixed exchange ratesKey variablesPricesInterest ratesIncomeMoney3Balance of payments adjustmentsSchools of thought on adjustmentClassic

3、al approach (1800s - early 1900s)Centered on gold standardEmphasized role of prices and interest ratesKeynesian approach (1930s onward)Emphasized income changes affecting adjustmentMonetarist approach (1960s-, Chicago school)Focus on role of money in changes and adjustment4Balance of payments adjust

4、mentsPrice adjustment - backgroundUnder the gold standard, each nations currency was backed by gold and had a fixed price in terms of goldImports and exports were paid for in goldA nations money supply (total amount of gold and gold-backed currency) was directly tied to balance of payments - whether

5、 gold was flowing in or out overall5Balance of payments adjustmentsPrice adjustment - background (contd)Balance of payments surplus would expand money supply; deficit would shrink money supplyBy the classical quantity theory of money, increases in the money supply led directly to an increase in over

6、all prices (and a shrinking money supply caused overall prices to fall)6Balance of payments adjustmentsPrice adjustment of the BOPDeficit nationsWould be losing gold, therefore shrinking their money supply and causing prices to fallLower prices would make their exports more competitive and lessen de

7、mand for imports, restoring equilibriumSurplus nationsWould be gaining gold, increasing money supply and price levelHigher prices would cut exports and encourage imports until the surplus was eliminated7Balance of payments adjustmentsGold flows are not directly linked to domestic money supplyNations

8、 are often not at full employmentIf economy is not at capacity, less likely that prices will rise as money supply doesPrices and wages are often not able to fall in the short runFalling money supply will cut output and employment rather than pricesProblems with price adjustment theory8Balance of pay

9、ments adjustmentsInflows of gold expand the money supply, causing short-term interest rates to fall; outflows cause rates to riseInvestors in surplus nations would send gold abroad in search of higher rates; deficit nations would receive gold from abroad for investment, restoring equilibriumInterest

10、 rate adjustment9Interest rate adjustmentBalance of payments adjustments10Balance of payments adjustmentsSurplus nations will experience rising national income, leading to an increased demand for imports - partially offsetting the surplusDeficit nations will experience falling income, leading to a d

11、rop in demand for imports - partially offsetting the deficitForeign repercussions effect - one countrys deficit is anothers surplus, so that while income is declining in one country, its exports will increase to the country with rising incomeIncome adjustment11Income adjustment appliedBalance of pay

12、ments adjustments12Balance of payments adjustmentsRequire governments not to interveneAutomatic systems seem desirable when they are believed to lead to full employment; when nations face unemployment and shrinking output, automatic mechanisms seem inadequateDisadvantages of automatic mechanisms13Ba

13、lance of payments adjustmentsBOP disequilibrium represents an imbalance between the supply and demand for moneyDemand for money is:Directly related to income and pricesInversely related to interest ratesSupply of money has two components:Domestic component - credit created by national governmentInte

14、rnational component - foreign exchange reservesMonetary adjustment - background14Balance of payments adjustmentsMonetary adjustmentPayments deficits are the result of an excess supply of money at homeExcess supply of money encourages imports, which results in foreign exchange reserves flowing overse

15、as and reducing the money supply15Balance of payments adjustmentsMonetary adjustmentExcess demand for money leads to a payments surplusExcess demand is reflected in higher interest rates and less spending on imports, encouraging a flow of foreign exchange into the country16Balance of payments adjustmentsMonetary adjustment - implicatio