Question

Does anyone know how it works when I use a credit card in a foreign country?  Does the credit card company have reserves of foreign money it uses to pay your bill and you pay the credit card company back in dollars?  Do the credit card companies buy currencies like banks do?   

World Currency Blog

As Catherine knows quite well, I am a fan of the idea of a world currency, though I was deeply disappointed to find out I wasn’t the first to favor it.  I might just be naive but I feel it’s more even and predictable and honest to have everyone on the same currency.  Then investors wouldn’t be scared off by devaluation in poor third world countries and those poor third world countries who don’t have the discipline to keep their currency stable won’t have to worry about it.  Also, current account would matter more which it should.  Then goods wouldn’t be bought based on which currency is relatively cheaper but based on real competition like efficiency and comparative advantage.  China wouldn’t be able to keep putting the United States in debt by making their goods artificially cheaper.  Also, shorting currencies like what happened in Thailand’s financial crisis wouldn’t be possible if there was only one currency. 

Specific times where one currency would have made my life easier was anytime I traveled.  I’m just not a math person and hated calculating how many dollars I was spending when I was buying stuff in other currencies.  But knowing the dollar price was the only way to know if something is expensive or not.  Weird huh?  It’s like translating the price into another language. 

A single currency would have also helped me out when I was living in Laos.  I would have to take out a whole fistful of money to buy anything because their currency was so weak.  The last time I was there it was 10,000 kip to a dollar. 

 Anyway the video was so cute.  I showed it to my mom ’cause she speaks chinese but she didn’t get the economic joke behind it.  She probably thought it was a real commercial for exchange rate glasses.  I’m finally in on a joke that excludes the layman.

I really don’t think the glasses are too farfetched an idea.  I’m sure plenty of blackberries that are hooked up to the internet instantly tell people on the go what the current exchange rate is.  Downloading the most up to date exchange rate to a pair of gaudy Buddy Holly glasses could be the latest thing this fall.

This evening

I’m sorry I couldn’t make it this evening but I’ll try to make up for it Wednesday in class.  mmmm….

Robert Mundell

1. What does the Mundell-Flemming theory imply? What does Mundell think it proves erroneous?

“The model shows that under a floating rate and perfect capital mobility, monetary policy becomes powerful, and fiscal policy powerless, in affecting output, whereas the opposite is true when the exchange rate is fixed. It also shows that if a country has a fixed exchange rate, it cannot in the long run have an independent monetary policy, and that if it has an independent monetary policy, it cannot have fixed exchange rates. This result holds whether or not there is capital mobility.”

I didn’t really understand this so I tried looking up some terms from the Oxford online dictionary:

monetary policy- A means by which central banks try to affect macroeconomic conditions by influencing the supply of money. Four main options are available: (i) printing more money (now rarely used in practice); (ii) direct controls over money held by the monetary sector; (iii) open-market operations; and (iv) influencing the interest rate. The traditional Keynesian view has been that monetary policy is at best a blunt instrument, while monetarism expresses the opposite view. In practice, governments have tended to employ ‘tight’ monetary policies, in the belief that this restrains inflation.

fiscal policy- The use of government spending and taxation to influence macroeconomic conditions. Fiscal policy was actively pursued to sustain full employment in the post-war years; however, monetarists and others have claimed that this set off the inflation of the 1970s. Fiscal policy has remained generally ‘tight’ in most Western countries since the 1980s.

So floating exrate –>  powerful monetary policy, powerless fiscal policy

fixed exrate –>  can’t have independent monetary policy

 It proves erroneous the “impossible trinity” (a country can have a fixed exchange rate and an independent monetary policy if it also has capital controls)

I hope we find out in class why this is so.

2. What does Mundell believe are qualifications for a world-currency? Does he feel that it is a possible goal to achieve?

The creation of a security area.  If war is a possibility then the currency would need to be back by gold.  Is this because if war broke out the mint can only be loyal to one side?  Is that why the confederates made their own money during the Civil War?  So I guess he feels this goal is possible to achieve so long as the world currency is backed by fixed precious metals.

Other important Mundell contributions:

- an increase in expected inflation would raise interest rates, but by less (Mundell-Tobin effect)

- under fixed exchange rates, monetary policy had to be devoted to the balance of payments and fiscal policy to stimulating the economy

- forcing China to appreciate its currency is bad.  would devastate the economy.

Great minds think alike

“Although the Canadian-born economist’s work during the 1960s has now become mainstream, a number of policies that he’s advocated at various times have not been embraced by the vast majority of his peers.  These include his call for a return to a gold standard when U.S. inflation hit double digits in 1980; a return to the post–World War II (1946–71) Bretton Woods fixed exchange rate system, modified to correct its defects; and the creation of a global currency. “

Global currency!  That’s what I ranted about before in another blog….the earth dollar or something.  See I’m not crazy. 

Jeapordy Game for Mexican Peso Crisis

jeapordy-mexican-peso-crisis.ppt

Mexican Peso Crisis Powerpoint

Mexican Peso Crisis

Attn: Catherine, here is my survey

What resources did you use to write the two graded papers?  Rank the choices (for each paper) using the following scale:

1= Not at all,  2= Some,  3= A Great Deal,  4= Exclusively

 

Your class notes   3

Dave’s notes on the wiki  2

Sources posted on the wiki or their summaries/reflections  2

Your blog posts  1

Other folks’ blog posts  1

Your research for the paper aside from the above 1

Other?  (Pls identify)

The international economics textbook 3

Websites found through googling key phrases 3

Oxford financial dictionary accessible through UMW library’s website 3

E-books accessible through UMW library’s website 2

Thanks very much!

I hate tractor trailers

I’m so sorry I missed class on Friday, guys.  A tractor trailer had to catch on fire on the day of my presentation.  I didn’t get here til after 12.  I took me three hours to get to school.  Wednesday a beer truck decided to crash going northbound so it took me 5 hours to get home.  Two truck accidents in the same week?

Anyway if I had been in class the major point I would have stressed the liquidity of the foreign investment.  Investment into Mexico came and went like a tidal wave because they were mostly portfolio equity and debt investments which are very sensitive to changes in the exchange rate.

Also, there was a heavy reliance on short term loans which made investors even more sensitive to changes because they can’t ride it out until things get better again.

Shifting from peso denominated cetes bonds to dollar denominated tesobonos made things worse because it depleted foreign reserves when they became due.
The change in interest rates became the government’s problem and not the investor’s problem.

On monday we’ll be having a jeapordy game so here’s our powerpoint to help you study for it.  (pay attention to bolded terms especially).

Thanks to my group for making the best of it.

Powerpoint for Mexican Peso Crisis

“Enticing Investors” article

It is so ironic that “In many SSA countries, export industries are already under pressure from currency appreciation arising from commodity price booms, such as those in oil and metals.”  Because of their booming raw materials industries, the appreciating currency will never let manufactured goods get off the ground because they would be too expensive.