【正文】 Country 1 Country 2 Country 3 19 The asymmetric position of the reserve center ?But, country 1 need do no intervention in the forex market ?and is free to set its moary policy. 20 If country 1 expands its money supply ?Country 1’s interest rate falls. ?To maintain the fixed rate, both countries 2 and 3 have to ?buy reserve assets with their own currencies, ?expanding their money supplies ?pushing their interest rate down to the level established by the reserve center. ?Output throughout the world (all the countries) would expand. 21 The asymmetric position of the reserve center (N countries) ?Assume N countries and N currencies in the world ?Country 1 is the reserve center if all other N1 countries peg their currencies to country 1’s. ?., all N1 countries have to intervene the foreign exchange market to keep their rate fixed to country 1’s. 22 If country 1 expands its money supply ?Country 1’s interest rate falls. ?To maintain the fixed rate, all other N1 countries have to ?buy reserve assets with their own currencies, ?expanding their money supplies ?pushing their interest rate down to the level established by the reserve center. ?Output throughout the world (all the countries) would expand. 23 The asymmetric position of the reserve center ?All other countries have to passively import the moary policy of the reserve center because of their mitment to peg their currencies to the reserve currency. ?Country 1 can independently choose its moary policy. 24 The collapse of Bretton Woods ? Late 1960s ?balance of payments disequilibria for many countries, including the US ?a series of currency crises ? August 15, 1971 ?United States informs IMF it will no longer freely buy and sell gold to settle international transactions. ?Par values and convertibility of the dollar—two main features of Bretton Woods system—cease to exist. 25 Post Bretton Woods ?each member chooses its own method of determining the exchange value of its money ?the member no longer base the value of its currency on gold and ?each member should inform other members about precisely how it determines the currency39。 GH1) 85 HH Home output, YH Foreign output, YF An increase in GH 86 FF curve ?FF curve: a relation of Home and Foreign output levels at which aggregate demand equals aggregate supply in Foreign. ?Fixed YH TH , find YF such that ?YF = CF(YFTF) + IF+ GF CAH(qH/F,YHTH, YF TF) ? qH/F ?Higher YH means higher ADH and hence higher YF ?Hence upward sloping FF curve 87 HH Home output, YH Foreign output, YF FF Output determination in a two country world 88 Disinflation, Slump, and Recovery, 19801995 89 Disinflation and the 19811983 recession ?October 1979: Federal Reserve Chairman Volcker announced an abrupt change in . moary policy aimed at ?fighting domestic inflation and ?stemming the dollar’s fall ?Volcker’s moary slowdown convinced the market ?November 1980 election, Reagan campaigned an antiinflation platform 90 US shortterm interest rate nearly doubled their 1978 level 91 . Federal Funds Rate 05101520251954 1957 1959 1962 1964 1967 1970 1972 1975 1977 1980 1982 1985 1988 1990 1993 1995 1998Source: FRB St. Louis, FRED database. 92 The dollar against DM appreciated % between the end of 1979 and the end of 1981 93 Source: 94 Effect of an appreciation ?Home goods more expensive relative to Foreign goods ?Hence, demand shifts from home goods to foreign goods 95 HH Home output, YH Foreign output, YF FF Home output falls Foreign output rises Effect of a decrease in E 96 Were all other countries happy about . dollar appreciation? ?Not necessarily! ?Stronger dollar hindered foreign countries in their own fights against inflation, both ?by raising the import prices they faced and ?by encouraging higher wage demands by their workers ?Other CBs responded by intervening in FX market to slow the dollar’s rise and their interest rates were driven upward 97 Worldwide recession ?Synchronized moary contraction all over the world threw the world economy into a deep recession, the most severe since the Great Depression of the 1930s 98 Unemployment Rates in Major Industrialized Countries, 19791994 (percent of labor force) 024681012141979 1981 1983 1985 1987 1989 1991 1993USUKCAFRGEITJPSource: Table 192 of Krugman and Obstfeld 99 Inflation Rates in Major Industrialized Countries, 19811994 and 196171 Average (percent per year) 505101520251967711981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994USUKCAFRGEITJPSource: Table 193 of Krugman and Obstfeld 100 Fiscal Policies, the Current Account, and the Resurgence of Protectionism ?1981: under Reagan, congress approved legislation ?lowering personal taxes ?providing incentives to businesses ?acceleration in defense spending, acpanied by cuts in government spending on domestic program ?., a budget deficit and a fiscal stimulus to the economy 101 Effect of home fiscal expansion ?home currency appreciates ?Foreign products bee relatively cheap and world demand for them rises ?a shift of FF up ?Home aggregate demand increases ?a shift of HH right 102 HH Home output, YH Foreign output, YF FF Home output rises Foreign output rises Effect of an increase in home fiscal expansion 103 Complication in the . analysis ?1981: fiscal policy mandated ?1982: actual execution of the policy ?1983: expansionary impact felt ?But anticipation of f