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1、MECHANISMS OF INTERNATIONAL ADJUSTMENT CHAPTER 4 Adjustment MechanismsWhat is adjustment mechanism? Works for the return to equilibrium after the initial equilibrium has been disruptedCurrent-account adjustmentAutomatic adjustmentDiscretionary (free) government policiesAutomatic adjustment of the cu
2、rrent-accountUnder a fixed exchange-rate systemAdjustment variables: prices and income2The balance of international paymentsTwo categories:Autonomous TransactionsCompensatory TransactionsThe balance of payment equilibrium means the equilibrium on autonomous transactions excluding compensatory transa
3、ctions.The reasons of disequilibriumCyclical disequilibriumIncome disequilibriumMonetary disequilibriumStructural disequilibriumTemporary disequilibriumShock disequilibriumDavid Hume(1711-1776), Scotland, twelve years older than Adam Smith(1723-1790), be refused to be a professor in University of Ed
4、inburgh Price AdjustmentsGold standard, late 1800s to early 1900sConditions for each member nationMoney supply = gold or paper money backed by goldOfficial price of gold defined in terms of national currency, which means Buy and sell gold at that priceFree import and export of gold Money supply dire
5、ctly tied to current account6Price AdjustmentsQuantity theory of moneyClassical price-adjustment mechanismIrving Fisher,1911purchasing power of moneyEquation of exchange: MV=PQ M money supplyV velocity of moneyP - average price at which each of the final goods is soldQ physical volume of all final g
6、oods produced 7Price AdjustmentsMV=PQ Total monetary expenditures on final goods = monetary value of the final goods soldAmount spent on final goods = amount received from selling them8Price AdjustmentsClassical economists AssumptionsQ is fixed at the full employment level in the long termV was cons
7、tantA change in M must induce a direct and proportionate change in P9Price AdjustmentsCriticisms against the price-adjustment mechanismClassical linkage between changes in a nations gold supply and changes in its money supply no longer holdsFull employment doesnt always exist Prices and wages are in
8、flexible in a downward directionStability and predictability of V - questioned10Financial Flows and Interest-Rate DifferentialsFactors affecting a nations capital and financial accountInterest-rate fluctuations in domestic and foreign marketsInvestment profitabilityNational tax policiesPolitical sta
9、bility11Interest-rate differentials between the United States and the rest of the world induce movements along the U.S. capital and financial account schedule. Relatively high (low) U.S. interest rates trigger net financial inflows (outflows) and an upward (downward) movement along the capital and f
10、inancial account schedule. The schedule shifts upward/downward in response to changes in noninterest rate determinants such as investment profitability, tax policies, and political stability.12Capital and financial account schedule for the U.S.FIGURE 4.1John Maynard Keynes(1883-1946), The general th
11、eory of employment, interest and moneyHis father is a famous logician and political economist, and his mother is a magistrate, Alderman and mayor of CambridgeIncome AdjustmentsIncome adjustment mechanismJohn Maynard Keynes, 1930sFocus on automatic changes in income to bring about adjustment in a nat
12、ions current accountUnder fixed exchange ratesInfluence of income changes in nations with current-account surpluses and deficits would help restore equilibrium automatically14Income AdjustmentsIncome adjustment mechanismUnder fixed exchange ratesPersistent current-account surplusRising income - Incr
13、easing importsCurrent-account deficit Fall in income - Declining importsEffects of income changes on import levels will reverse the disequilibrium in the current account15Income AdjustmentsThe foreign repercussion effectIncome adjustment mechanismAnd include the impact that changes in domestic expen
14、ditures and income levels have on foreign economiesBoth the rise in income of the surplus nation and the fall in income of the deficit nation are dampened16Income AdjustmentsImportance of the foreign repercussion effectDepends on the economic size of a countryA small nation that increases its import
15、s from a large nationLittle impact on the large nations income levelMajor trading nationsSignificant foreign repercussion effect17Disadvantages of Automatic Adjustment MechanismsAn efficient adjustment mechanism Requires central bankers to forgo (give up) their use of monetary policy To promote the
16、goal of full employment without inflationEach nation must be willing to accept inflation or recession When current-account adjustment requires it18Conditions to realize the autonomous adjustmentFree economy, no governmental policyThe import(export) goods supply and demands elasticity is very big.gross demand and capital flow is sensitive to interest rate. 19Monetary AdjustmentsMonetary approach to balance of paymentsBalance of payments - affected
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