Chapter 18 The International Monetary System, 1870-1973
Chapter 18 ▪ The International Monetary System,1870-1973
Chapter organization Macroeconomic Policy Goals in an Open Economy International Macroeconomic Policy Under the Gold Standard. 1870-1914 The Interwar Years. 1918-1939 a The bretton Woods System and the International Monetary Fund Internal and External balance Under the bretton Woods System Analyzing policy Options Under the Bretton Woods System Copyright C 2003 Pearson Education, Inc Slide 18-2
Copyright © 2003 Pearson Education, Inc. Slide 18-2 Chapter Organization ▪ Macroeconomic Policy Goals in an Open Economy ▪ International Macroeconomic Policy Under the Gold Standard, 1870-1914 ▪ The Interwar Years, 1918-1939 ▪ The Bretton Woods System and the International Monetary Fund ▪ Internal and External Balance Under the Bretton Woods System ▪ Analyzing Policy Options Under the Bretton Woods System
Chapter organization The External balance Problem of the united states a Worldwide Inflation and the Transition to Floating Rates Summary Copyright C 2003 Pearson Education, Inc Slide 18-3
Copyright © 2003 Pearson Education, Inc. Slide 18-3 ▪ The External Balance Problem of the United States ▪ Worldwide Inflation and the Transition to Floating Rates ▪ Summary Chapter Organization
Introduction The interdependence of open national economies has made it more difficult for governments to achieve full employment and price stability The channels of interdependence depend on the monetary and exchange rate arrangements This chapter examines the evolution of the international monetary system and how it influenced macroeconomic policy Copyright C 2003 Pearson Education, Inc Slide 18-4
Copyright © 2003 Pearson Education, Inc. Slide 18-4 Introduction ▪ The interdependence of open national economies has made it more difficult for governments to achieve full employment and price stability. • The channels of interdependence depend on the monetary and exchange rate arrangements. ▪ This chapter examines the evolution of the international monetary system and how it influenced macroeconomic policy
Macroeconomic Policy goals in an Open Economy In open economies, policymakers are motivated by two goals Internal balance It requires the full employment of a countrys resources and domestic price level stability External balance It is attained when a country's current account is neither so deeply in deficit nor so strongly in surplus Copyright C 2003 Pearson Education, Inc Slide 18-5
Copyright © 2003 Pearson Education, Inc. Slide 18-5 Macroeconomic Policy Goals in an Open Economy ▪ In open economies, policymakers are motivated by two goals: • Internal balance – It requires the full employment of a country’s resources and domestic price level stability. • External balance – It is attained when a country’s current account is neither so deeply in deficit nor so strongly in surplus
Macroeconomic Policy goals in an Open Economy Internal Balance: Full Employment and Price-Level Stability Under-and overemployment lead to price level movements that reduce the economy's efficiency To avoid price-level instability, the government must Prevent substantial movements in aggregate demand relative to its full-employment level Ensure that the domestic money supply does not grow too quickly or too slowly. Copyright C 2003 Pearson Education, Inc Slide 18-6
Copyright © 2003 Pearson Education, Inc. Slide 18-6 ▪ Internal Balance: Full Employment and Price-Level Stability • Under-and overemployment lead to price level movements that reduce the economy’s efficiency. • To avoid price-level instability, the government must: – Prevent substantial movements in aggregate demand relative to its full-employment level. – Ensure that the domestic money supply does not grow too quickly or too slowly. Macroeconomic Policy Goals in an Open Economy
Macroeconomic Policy goals in an Open Economy External Balance: The Optimal Level of the Current Account External balance has no full employment or stable prices to apply to an economys external transactions An economy's trade can cause macroeconomic problems depending on several factors The economys particular circumstances Conditions in the outside world The institutional arrangements governing its economic relations with foreign countries Copyright C 2003 Pearson Education, Inc Slide 18-7
Copyright © 2003 Pearson Education, Inc. Slide 18-7 Macroeconomic Policy Goals in an Open Economy ▪ External Balance: The Optimal Level of the Current Account • External balance has no full employment or stable prices to apply to an economy’s external transactions. • An economy’s trade can cause macroeconomic problems depending on several factors: – The economy’s particular circumstances – Conditions in the outside world – The institutional arrangements governing its economic relations with foreign countries
Macroeconomic Policy goals in an Open Economy Problems with Excessive current Account Deficits. They sometimes represent temporarily high consumption resulting from misguided government policies They can undermine foreign investors' confidence and contribute to a lending crisis Copyright C 2003 Pearson Education, Inc Slide 18-8
Copyright © 2003 Pearson Education, Inc. Slide 18-8 • Problems with Excessive Current Account Deficits: – They sometimes represent temporarily high consumption resulting from misguided government policies. – They can undermine foreign investors’ confidence and contribute to a lending crisis. Macroeconomic Policy Goals in an Open Economy
Macroeconomic Policy goals in an Open Economy Problems with Excessive current Account Surpluses: They imply lower investment in domestic plant and equipment ey can create potential problems for creditors to collect their money They may be inconvenient for political reasons Copyright C 2003 Pearson Education, Inc Slide 18-9
Copyright © 2003 Pearson Education, Inc. Slide 18-9 Macroeconomic Policy Goals in an Open Economy • Problems with Excessive Current Account Surpluses: – They imply lower investment in domestic plant and equipment. – They can create potential problems for creditors to collect their money. – They may be inconvenient for political reasons
Macroeconomic Policy goals in an Open Economy Several factors might lead policymakers to prefer that domestic saving be devoted to higher levels of domestic investment and lower levels of foreign investment It may be easier to tax It may reduce domestic unemployment It can have beneficial technological spillover effects Copyright C 2003 Pearson Education, Inc Slide 18-10
Copyright © 2003 Pearson Education, Inc. Slide 18-10 – Several factors might lead policymakers to prefer that domestic saving be devoted to higher levels of domestic investment and lower levels of foreign investment: – It may be easier to tax – It may reduce domestic unemployment. – It can have beneficial technological spillover effects Macroeconomic Policy Goals in an Open Economy
