International Monetary and Financial Economics with Economic Applications

by Daniels, Joseph P.

• ISBN13: 9780324261608
• ISBN10: 0324261608
• Edition: 3rd
• Format: Paperback
• Copyright: 2004-09-28
• Publisher: South-Western College Pub

Summary

This text covers the full range of topics in international money and finance, giving solid attention to 3 key areas - internationalfinance, open-economy macroeconomics, and international money and banking. It consistently connects theory to real-world policy andbusiness applications (and strikes a balance between business relevance and policy relevance), demonstrating to students the contemporaryapplications that can be explored, and that international monetary and financial economics is a dynamic and interesting subject area thathas become of great importance for international affairs and business.

Table of Contents

Unit 1: International Payments and Exchange
Keeping Up With a Changing World-Trade Flows, Capital Flows, and the Balance of Payments	2	(32)
Why It Is Important to Understand International Money and Finance	3	(1)
International Economic Integration: The Importance of Global Trade and Financial Markets	4	(6)
The Real and Financial Sectors of an Economy	5	(1)
World Trade in Goods and Services	5	(2)
International Transactions in Financial Assets	7	(2)
The Most Globalized Nations	9	(1)
Management Notebook: What Are the Most Globalized Firms?	10	(2)
The Balance of Payments	12	(5)
Balance of Payments as a Double-Entry Bookkeeping System	12	(2)
Balance of Payments Accounts	14	(3)
Policy Notebook: Are Trade and Foreign Direct Investment Substitutes or Complements?	17	(2)
Deficits and Surpluses in the Balance of Payments	18	(1)
Online Notebook: Are U.S. Exports Understated Because of the Internet?	19	(2)
Other Deficit and Surplus Measures	20	(1)
Examples of International Transactions and How They Affect the Balance of Payments	21	(2)
Example 1: Import of an Automobile	21	(1)
Example 2: A College Student Travels Abroad	22	(1)
Example 3: A Foreign Resident Purchases a Domestic Treasury Bill	22	(1)
Example 4: The United States Pays Interest on a Foreign-Held Asset	22	(1)
Example 5: A Charitable Organization in the United States Provides Humanitarian Aid Abroad	22	(1)
Examples Combined	23	(1)
The Capital Account and the International Flow of Assets	23	(5)
Example: A College Student	24	(1)
A Capital Account Surplus	24	(1)
The United States as a Net Debtor	25	(1)
Debt Relief for the Heavily Indebted Poor Countries	26	(2)
Relating the Current Account Balance and Capital Flows	28	(2)
Chapter Summary	30	(1)
Questions and Problems	30	(2)
Online Application	32	(1)
Selected References and Further Reading	32	(2)
The Market for Foreign Exchange	34	(36)
Exchange Rates and the Market for Foreign Exchange	35	(3)
The Role of the Foreign Exchange Market	36	(2)
Online Notebook: Online Foreign Exchange Services	38	(6)
Exchange Rates as Relative Prices	38	(3)
Bid-Ask Spreads and Trading Margins	41	(1)
Real Exchange Rates	42	(1)
The Effect of Price Changes	42	(2)
Measuring the Overall Strength or Weakness of a Currency: Effective Exchange Rates	44	(4)
Constructing an Effective Exchange Rate	44	(1)
A Two-Country Example of an Effective Exchange Rate	45	(3)
Composite Currencies	48	(2)
Special Drawing Right (SDR)	49	(1)
Calculation of the SDR	49	(1)
Foreign Exchange Arbitrage	50	(2)
The Demand for and Supply of Currencies	52	(7)
The Demand for a Currency	52	(1)
The Supply of a Currency	53	(2)
The Equilibrium Exchange Rate	55	(2)
Foreign Exchange Market Intervention	57	(2)
Purchasing Power Parity	59	(3)
Absolute Purchasing Power Parity	59	(3)
Policy Notebook: The Big Mac Index	62	(2)
Relative Purchasing Power Parity	63	(1)
Management Notebook: Does the Border between Canada and the United States Matter?	64	(2)
Chapter Summary	66	(1)
Questions and Problems	67	(1)
Online Application	68	(1)
Selected References and Further Reading	69	(1)
Exchange-Rate Systems, Past To Present	70	(32)
Exchange-Rate Systems	71	(1)
The Gold Standard	72	(4)
The Gold Standard as an Exchange-Rate System	72	(2)
Performance of the Gold Standard	74	(1)
The Collapse of the Gold Standard	75	(1)
The Bretton Woods System	76	(6)
The Bretton Woods Agreement	77	(2)
Performance of the Bretton Woods System	79	(3)
The Smithsonian Agreement and the Snake in the Tunnel	82	(1)
The Flexible-Exchange-Rate System	82	(5)
The Economic Summits and a New Order	83	(1)
Performance of the Floating-Rate System	83	(2)
The Plaza Agreement and the Louvre Accord	85	(1)
The Euro	86	(1)
Other Forms of Exchange-Rate Arrangements Today	87	(5)
Crawling Pegs	87	(3)
Currency Baskets	90	(1)
Independent Currency Authorities	91	(1)
Management Notebook: Should the Iraqi Dinar Be Pegged to a Basket of Oil?	92	(2)
Dollarization	93	(1)
Fixed or Floating Exchange Rates?	94	(1)
Policy Notebook: Should China Peg or Float?	95	(1)
Chapter Summary	96	(1)
Questions and Problems	97	(1)
Online Application	98	(1)
Selected References and Further Reading	98	(4)
Unit 2: International Financial Instruments, Markets, and Institutions
The Forward Currency Market and International Financial Arbitrage	102	(30)
Foreign Exchange Risk	103	(2)
Types of Foreign Exchange Risk Exposure	104	(1)
Management Notebook: Exchange Rate Risk and the Annual Report of Ball Corporation	105	(1)
Hedging Foreign Exchange Risk	105	(1)
The Forward Exchange Market	106	(4)
Covering a Transaction with a Forward Contract	106	(1)
Determination of Forward Exchange Rates	107	(1)
The Forward Exchange Rate as a Predictor of the Future Spot Rate	108	(2)
International Financial Arbitrage	110	(8)
The International Flow of Funds and Interest Rate Determination	110	(2)
Interest Parity	112	(1)
Exchange Uncertainty and Covered Interest Parity	113	(5)
Uncovered Interest Parity	118	(3)
Uncovered Interest Arbitrage	119	(1)
Risk and Uncovered Interest Parity	120	(1)
Risks Other than Foreign Exchange Risk	120	(1)
Online Notebook: Policy Transparency via the Internet	121	(1)
Tests of Uncovered Interest Parity	121	(1)
Foreign Exchange Market Efficiency	122	(1)
Market Efficiency	123	(1)
Evidence on Foreign Exchange Market Efficiency	123	(1)
International Financial Markets	123	(5)
International Capital Markets	124	(1)
International Money Markets	124	(1)
Eurobonds, Euronotes, and Eurocommercial Paper	124	(1)
Eurocurrencies	125	(3)
Chapter Summary	128	(1)
Questions and Problems	128	(2)
Online Application	130	(1)
Selected References and Further Reading	130	(2)
Interest Yields, Interest-Rate Risk, and Derivative Securities	132	(49)
Interest Rates	133	(12)
Interest Yields and Financial Instrument Prices	134	(4)
Term to Maturity and Interest-Rate Risk	138	(1)
The Term Structure of Interest Rates	139	(4)
The Risk Structure of Interest Rates	143	(2)
Interest Rate Differentials-Excess Returns and Failure of Uncovered Interest Parity	145	(2)
Breakdown of Uncovered Interest Parity and Excess Returns	146	(1)
Management Notebook: Why Uncovered Interest Parity May Hold, but Not for Very Long	147	(3)
Accounting for Differences in Excess Returns to Help Explain International Interest Rate Differences	148	(2)
Real Interest Rates and Real Interest Parity	150	(3)
Real Interest Rates: The Fisher Equation	151	(1)
Real Interest Parity	151	(2)
Hedging, Speculation, and Derivative Securities	153	(5)
Possible Responses to Interest-Rate Risk	153	(1)
Derivative Securities	154	(4)
Common Derivative Securities and Their Risks	158	(6)
Forward Contracts	158	(1)
Futures	159	(4)
Options	163	(1)
Management Notebook: Bad Days for the Badla?	164	(10)
Swaps	170	(2)
Derivatives Risks and Regulation	172	(2)
Management Notebook: Following the Money in Derivatives Markets	174	(2)
Chapter Summary	176	(1)
Questions and Problems	177	(2)
Online Application	179	(1)
Selected References and Further Reading	179	(2)
International Banking, Central Banks, and Supranational Financial Policymaking Institutions	181	(49)
International Dimensions of Financial Intermediation	183	(4)
Financial Intermediation	183	(2)
Economies of Scale	185	(1)
Financial Intermediation Across National Boundaries	186	(1)
Online Notebook: Foreign Exchange Market Intermediation Moves to the Web	187	(1)
Banking Around the Globe	188	(4)
Bank versus Market Finance	189	(1)
Differences in Bank Market Structure	189	(1)
A New Convergence: Universal Banking	190	(1)
Secrecy and Taxation	191	(1)
Global Payments and Financial System Risks	192	(8)
Global Payment Systems	193	(1)
Payment-System Risks	194	(4)
Financial Instability and International Financial Crises	198	(2)
Policy Notebook: Using ``Exchange Market Pressures'' to Assess Contagion Effects	200	(2)
Bank Regulation and Capital Requirements	202	(2)
The Goals of Bank Regulation	202	(1)
Bank Capital Requirements	203	(1)
Policy Notebook: Governments Turn to Deposit Insurance to Try to Make Banks Safer than Mattresses	204	(4)
Central Banks	208	(5)
Central Bank Assets	209	(3)
Central Bank Liabilities and Net Worth	212	(1)
What Do Central Banks Do?	213	(8)
Central Banks as Government Banks	213	(2)
Central Banks as Bankers' Banks	215	(1)
Central Banks as Monetary Policymakers	215	(6)
Supranational Financial Policymaking Institutions	221	(4)
The International Monetary Fund	221	(2)
The World Bank	223	(2)
Chapter Summary	225	(2)
Questions and Problems	227	(1)
Online Application	228	(1)
Selected References and Further Reading	229	(1)
The International Financial Architecture and Emerging Economies	230	(36)
International Capital Flows	231	(12)
Explaining the Direction of Capital Flows	232	(6)
Capital Allocations and Economic Growth	238	(1)
Capital Misallocations and Their Consequences	239	(2)
Maximizing Benefits and Minimizing Risks	241	(1)
Where Do Financial Intermediaries Fit In?	241	(2)
Capital Market Liberalization and International Financial Crises	243	(4)
Are All Capital Flows Equal?	243	(1)
The Role of Capital Flows in Recent Crisis Episodes	244	(3)
Policy Notebook: Free Trade Agreements and Capital Market Liberalization	247	(1)
Exchange Rate Regimes and Financial Crises	247	(3)
Schools of Thought on Exchange Rate Regimes	247	(1)
The Corners Hypothesis	248	(1)
Dollarization	248	(1)
Peg, Take the Middle Road, or Float?	249	(1)
Policy Notebook: Risk Premium and the Failure of Interest Rate Convergence	250	(3)
Evaluating the Status Quo	252	(1)
Online Notebook: Data Dissemination via the Internet	253	(2)
Does the International Financial Architecture Need a Redesign?	255	(5)
Crisis Prediction and Early Warning Systems	256	(1)
Rethinking Economic Institutions and Policies	257	(3)
Chapter Summary	260	(1)
Questions and Problems	261	(2)
Online Application	263	(1)
Selected References and Further Reading	263	(3)
Unit 3: Exchange-Rate and Balance-of-Payments Determination
Traditional Approaches to Balance-of-Payments and Exchange-Rate Determination	266	(26)
Common Characteristics of the Traditional Approaches	267	(1)
Exports, Imports, and the Demand for and Supply of Foreign Exchange	268	(6)
Derivation of the Demand for Foreign Exchange	268	(1)
Elasticity and the Demand for Foreign Exchange	269	(2)
Derivation of the Supply of Foreign Exchange	271	(1)
Elasticity and the Supply of Foreign Exchange	272	(2)
The Elasticities Approach	274	(7)
The Exchange Rate and the Balance of Payments	274	(3)
Short- and Long-Run Elasticity Measures and the J-Curve	277	(3)
Pass-Through Effects	280	(1)
Management Notebook: Do Exporters Pass Through Exchange-Rate Fluctuations?	281	(1)
The Absorption Approach	282	(3)
Modeling the Absorption Approach	282	(1)
Determination of the Current Account Balance	283	(1)
Economic Expansion and Contraction	283	(2)
Policy Notebook: Did U.S. Economic Growth Cause the U.S. Trade Deficit?	285	(2)
Policy Instruments	286	(1)
Chapter Summary	287	(1)
Questions and Problems	288	(2)
Online Application	290	(1)
Selected References and Further Reading	290	(2)
Monetary and Portfolio Approaches to Balance-of-Payments and Exchange-Rate Determination	292	(38)
Central Bank Balance Sheets	293	(5)
A Nation's Monetary Base	293	(2)
A Nation's Money Stock	295	(1)
The Relationship between the Monetary Base and the Money Stock	296	(2)
Managed Exchange Rates: Foreign Exchange Interventions	298	(7)
Mechanics of Foreign Exchange Interventions	298	(2)
Foreign Exchange Interventions and the Money Stock	300	(2)
Sterilization of Interventions	302	(3)
The Monetary Approach to Balance-of-Payments and Exchange-Rate Determination	305	(6)
The Cambridge Approach to Money Demand	306	(1)
Money, the Balance of Payments, and the Exchange Rate	306	(1)
The Monetary Approach and a Fixed-Exchange-Rate Arrangement	307	(3)
The Monetary Approach and a Flexible-Exchange-Rate Arrangement	310	(1)
Applying the Monetary Approach: A Two-Country Setting	311	(3)
A Two-Country Monetary Model	311	(1)
An Example of Exchange-Rate Determination for Two Nations	312	(2)
The Portfolio Approach to Exchange-Rate Determination	314	(1)
Households' Allocation of Wealth	314	(1)
Management Notebook: The Global Equities Explosion	315	(1)
Online Notebook: For Foreign Securities Regulators, ``Out of Sight'' Doesn't Mean ``Out of Mind''	316	(2)
Policy Notebook: How Closely Related Are the Nasdaq Composite Index and the Dollar-Euro Exchange Rate?	318	(6)
To Sterilize or Not to Sterilize?	320	(2)
Do Interventions Accomplish Anything?	322	(2)
Chapter Summary	324	(1)
Questions and Problems	325	(1)
Online Application	326	(1)
Selected References and Further Reading	327	(3)
Unit 4: Open Economy Macroeconomics and Policy Analysis
An Open Economy Framework	330	(47)
Measuring an Economy's Performance: Gross Domestic Product and Price Indexes	331	(6)
Gross Domestic Product	331	(1)
Nominal GDP, Real GDP, and the GDP Price Deflator	332	(3)
Fixed- and Flexible-Weight Price Measures	335	(2)
Real Income and Expenditures: The IS Schedule	337	(1)
Policy Notebook: A New Price Index Catches On	338	(8)
Private and Public Expenditures	341	(5)
Management Notebook: How the Stock Market Affects Consumption Spending	346	(11)
Equilibrium Income and Expenditures	349	(3)
The IS Schedule	352	(5)
The Market for Real Money Balances: The LM Schedule	357	(3)
The Demand for Money	358	(2)
Online Notebook: Making Islamic Financial Services Available on the Internet	360	(7)
The LM Schedule	363	(4)
The Balance of Payments: The BP Schedule and the IS-LM-BP Model	367	(5)
Maintaining a Balance-of-Payments Equilibrium: The BP Schedule	367	(2)
The IS-LM-BP Model	369	(3)
Chapter Summary	372	(1)
Questions and Problems	373	(2)
Online Application	375	(1)
Selected References and Further Reading	375	(2)
Economic Policy With Fixed Exchange Rates	377	(40)
The Objectives of Policy	378	(6)
Internal Balance Objectives	378	(4)
External Balance Objectives	382	(2)
The Role of Capital Mobility	384	(2)
Capital Mobility and the BP Schedule	385	(1)
Policy Notebook: End of the Line for Capital Controls in India?	386	(3)
Perfect Capital Mobility	388	(1)
Online Notebook: A Web Route to Avoiding Lines for Currency Exchange	389	(1)
Fixed Exchange Rates and Imperfect Capital Mobility	390	(6)
Monetary Policy under Fixed Exchange Rates and Imperfect Capital Mobility	391	(5)
Policy Notebook: Why Are There So Many Foreign Exchange Reserves in East Asia?	396	(6)
Fiscal Policy under Fixed Exchange Rates	397	(5)
Fixed Exchange Rates and Perfect Capital Mobility	402	(11)
Economic Policies with Perfect Capital Mobility and a Fixed Exchange Rate: The Small Open Economy	403	(2)
Economic Policies with Perfect Capital Mobility and a Fixed Exchange Rate: A Two-Country Example	405	(8)
Chapter Summary	413	(1)
Questions and Problems	414	(1)
Online Application	415	(1)
Selected References and Further Reading	416	(1)
Economic Policy With Floating Exchange Rates	417	(34)
Floating Exchange Rates and Imperfect Capital Mobility	418	(6)
The Effects of Exchange Rate Variations in the IS-LM-BP Model	419	(1)
Monetary Policy under Floating Exchange Rates	420	(2)
Fiscal Policy under Floating Exchange Rates	422	(2)
Floating Exchange Rates and Perfect Capital Mobility	424	(9)
Economic Policies with Perfect Capital Mobility and a Floating Exchange Rate: The Small Open Economy	424	(4)
Economic Policies with Perfect Capital Mobility and a Floating Exchange Rate: A Two-Country Example	428	(5)
Fixed versus Floating Exchange Rates	433	(1)
Efficiency Arguments for Fixed versus Floating Exchange Rates	433	(1)
Management Notebook: Does the Verifiability Problem of Intermediate Exchange-Rate Systems Make Them Infeasible?	434	(1)
Online Notebook: Should Just Anyone Be Able to Broker Internet Currency Trades?	435	(3)
Policy Notebook: Would Imposing a Tobin Tax Reduce Exchange-Rate Volatility?	438	(9)
Stability Arguments for Fixed versus Floating Exchange Rates	439	(6)
Monetary Policy Autonomy and Fixed versus Floating Exchange Rates	445	(2)
Chapter Summary	447	(1)
Questions and Problems	448	(1)
Online Application	449	(1)
Selected References and Further Reading	449	(2)
The Price Level, Real Output, and Economic Policymaking	451	(49)
Aggregate Demand	452	(16)
The Aggregate Demand Schedule	452	(2)
Factors that Determine the Position of the Aggregate Demand Schedule in an Open Economy	454	(14)
Aggregate Supply	468	(3)
Output and Employment Determination	468	(3)
Management Notebook: Where in the World Do Workers Produce the Most Output per Hour?	471	(3)
Wage Flexibility, Aggregate Supply, and the Price Level	473	(1)
Management Notebook: Deflation Challenges the Japanese Wage System	474	(4)
Real Output, the Price Level, and Economic Policymaking	478	(4)
The Equilibrium Price Level and the Equilibrium Real Output Level	479	(1)
The Output and Price Level Effects of Economic Policies with Floating versus Fixed Exchange Rates	480	(2)
Policy Notebook: Are Floating-Exchange-Rate Systems More Inflationary?	482	(1)
Rules versus Discretion in Economic Policymaking	483	(11)
Expectations and the Flexibility of Nominal Wages	483	(3)
Discretion, Credibility, and Inflation	486	(8)
Chapter Summary	494	(1)
Questions and Problems	495	(1)
Online Application	496	(1)
Selected References and Further Reading	497	(3)
Unit 5: Domestic and Multinational Policymaking in a Global Economy
Domestic Economic Policymaking in a Global Economy	500	(38)
The Policy Assignment Problem	501	(6)
Finding the Best Policy Mix for Internal and External Balance	502	(3)
Assigning Internal and External Objectives	505	(2)
Exchange-Rate Responses to Policy Actions with Sticky Wages and Prices-Exchange-Rate Overshooting	507	(5)
The Long-Run Adjustments of the Exchange Rate to a Monetary Expansion	508	(1)
Exchange-Rate Overshooting	509	(3)
Openness and the Output-Inflation Relationship-How Globalization Alters the Effects of Policies	512	(2)
How Increased Openness Can Make Output Less Responsive to Inflation	513	(1)
Policy Notebook: Measuring Openness	514	(3)
How Greater Openness Can Increase the Sensitivity of Output to Inflation	515	(2)
Management Notebook: In Which Developed Nations Do Domestic Industries Face the Most Extensive Government Regulations?	517	(5)
Evidence on Openness and the Output-Inflation Relationship	518	(4)
Openness and Inflation	522	(6)
The Global Openness-Inflation Relationship	522	(1)
Just How Strong Is the Openness-Inflation Relationship?	523	(5)
New Open Economy Macroeconomics and Its Policy Implications	528	(4)
Features of the New Open Economy Macroeconomics	529	(1)
Policy Implications of the New Open Economy Macroeconomics	530	(2)
Management Notebook: How Legal Restrictions Hamstring Middle Eastern Participation in the Global Economy	532	(1)
Chapter Summary	533	(1)
Questions and Problems	534	(2)
Online Application	536	(1)
Selected References and Further Reading	536	(2)
Policy Coordination, Monetary Union, and Target Zones	538	(39)
International Interdependence	539	(4)
Structural Interdependence and International Policy Externalities	539	(2)
Accounting for Interdependence: International Policy Cooperation and Coordination	541	(2)
Perfect Capital Mobility Revisited: Can International Policy Coordination Pay?	543	(5)
The Aggregate Demand Effects of National Monetary Policies	543	(2)
Conflicting Monetary Policies and the Potential Role of Policy Coordination	545	(2)
A Potential Gain from Policy Coordination	547	(1)
The Pros and Cons of International Policy Coordination	548	(9)
Potential Benefits of International Policy Coordination	549	(2)
Some Potential Drawbacks of International Policy Coordination	551	(6)
The Economics of Monetary Unions	557	(3)
Optimal Currency Areas	557	(1)
How Separate Currencies and a Floating Exchange Rate Can Be Beneficial	558	(2)
Policy Notebook: Would the United States Have Benefitted from Separate Currencies during the Great Depression?	560	(3)
Rationales for Separate Currencies	561	(2)
Policy Notebook: Making Euros Hazardous to Counterfeiters' Health--or Yours?	563	(1)
Vehicle Currencies	564	(3)
The Dollar's Predominance	564	(1)
The Euro's Impact	565	(2)
Splitting the Difference: Exchange Rate Target Zones	567	(5)
Target Zones	567	(3)
Does the Target Zone Model Fit the Facts?	570	(2)
Chapter Summary	572	(1)
Questions and Problems	573	(2)
Online Application	575	(1)
Selected References and Further Reading	575	(2)
Glossary	577	(10)
Index	587