Lecture 9
ECON 5327-01
July 3, 2013
Topics to be covered on July 8, 2013
I.
II.
Historical monetary arrangements
a. The classic Gold standard
i. Price specie flow mechanism
ii. Advantages and disadvantages of the classic gold standard
1. The sterility of monetary policy under a gold standard
b. The interwar period
i. Competitive devaluations
c. Bretton Woods administration
i. 5 key elements of the agreement
ii. Triffin paradox
d. Smithsonian agreement
e. The modern floating period
IMF classifications of exchange rate regimes
Readings: Eun and Resnick, Chapter 2.
Information related to the “Big Mac Index”:
http://www.economist.com/content/big-mac-index
Continued news about the weakness of emerging market currencies was reported in the
Wall Street Journal on July 2, 2013. The article, entitled, “Forces converge in emerging
markets,” highlighted weakness in the Brazilian real, Indian rupee, Turkish lira, and
South African rand. Each of these currencies may be weakening for various idiosyncratic
reasons. In Turkey, for example, political unrest may be causing some capital flight,
while the slowing of the Chinese economy may be affecting Chinese demand for
commodities, hitting countries like Brazil and Australia who export natural resources
such as copper and iron.
Not surprisingly, the article attributes some of the weakness of emerging market
currencies to perceived changes in the stance of US monetary policy. According to the
article, “an outflow of funds from so-called emerging markets has picked up pace over
the past month, triggered by expectations among some investors that the days of easy
money globally are coming to an end as the US economy recovers.”
We will connect the movement in currency values to movements in prices between
countries using purchasing power parity. The study of purchasing power parity has
resulted in quite a bit of controversy in international finance
Outline for July 3, 2013
I.
Purchasing power parity continued
a. The law of one price
b. Absolute purchasing power parity
i. Reasons purchasing power parity may fail to hold
c. Relative purchasing power parity
d. The real exchange rate
i. Example: The case of Mexico
II. Introduction to the history of monetary arrangements
a. The classic Gold standard
b. The interwar period
c. Bretton Woods administration
e. Smithsonian agreement
f. The modern floating period
i. Jamaica agreement (1976)
ii. Plaza Accord (1985)
iii. Louvre Accord (1987)
iv. The launching of the euro (1999)
Review Questions:
Please review the questions from lecture 8. We didn’t cover the material related to that
question until class on Wednesday, July 3.