【正文】 uture fiscal expansion in 1981 would simply have appreciated the dollar. ?Thus, in 1981, a shift of FF but not HH. Hence only a smaller increase in home output. 104 What did German and Japan do? ?They were fear of inflation and had contractionary fiscal policies. ?Thus, encourage dollar appreciation ?Dollar again DM appreciated percent from the end of 1979 to February 1985 ?December 1982: recession at lowest point and . economy began to recover ?Why 1982? Because of expansionary fiscal policy in 1982 and a looser M policy. 105 Protectionism resurged ?Persistently poor economic performance in the 1980s ?Pressures on government to protect industries in the exporting and importpeting industries. ?As . recovery slowed late in 1984, protectionist pressures snowballed. 106 The Plaza agreement ?September 22, 1985: G5 at New York’s Plaza Hotel G5 = . Britain, France, Germany and Japan ?agreed to jointly intervene in the foreign exchange market to bring a dollar depreciation. ?September 23, 1985: dollar depreciated sharply through early 1987 ?. maintained a loose moary policy and hence low interest rate relative to the foreign currency rates. 107 Louvre Accord ?February 22, 1987: G5 plus Canada pledged to stabilize nominal exchange rates around the levels then prevailing. ?Governments set up target zones for exchange rates and agreed to defend them by intervening in the foreign exchange market 108 October 1987 ?. external deficit remained high after the Louvre Accord ?October 1987: . stock market dropped and then crashed following American criticism of a German interest rate hike ?Greenspan had to provide liquidity to a troubled financial system ?. dollar depreciated although other countries also lowered their interest rate 109 Does sterilized intervention work? ?No! Unless the intervention is backed up by changes in moary or fiscal policy rather than the milder expedient of sterilized intervention ?. tradeoff between internal balance and exchange stability. 110 Global slump once again ?.: ?rapid moary growth in 19851986 fueled inflation in 19871988 ?exceptionally tight moary policy led the economy into a prolonged economic downturn by the summer of 1990 ?begin to rebound only in 1992 111 Global slump once again ?Britain: ?Loose moary policy in 1988 led to higher inflation by 1989 ?1990: entered European Moary System exchange rate mechanism agreeing to peg the pound sterling ?Fixed rate with higher inflation makes home good more expensive ?Economy recovered only after freeing its exchange rate in 1992 112 Global slump once again ?Japan: ?inflation up in 1989 (possibly a result of a relatively loose moary policy over 198688) ?real estate price and stock market skyrocketed ?1989: tight moary policy ?Nikkei fell more than half from 1990 to 1992 ?Banking crisis ?Recession started in early 1992 113 Global slump once again ?Germany ?July 1, 1990: East and West Germany reunited ?agreed to convert EG money supply to WG money supply at 1DM = 1 East German Mark ?implies in Germany’s DM supply over 1990 ?coupled with fiscal expansion, inflation rose 114 International Policy Coordination Failures revisited Prisoners’ dilemma 115 ?? = 0% ?U = % ??* = 2% ?U* = % ?? = % ?U = % ??* = % ?U* = % ?? = 1% ?U = 1% ??* = 1% ?U* = 1% ?? = 2% ?U = % ??* = 0% ?U* = % Some What Restrictive Some What Restrictive Very Restrictive Very Restrictive Home Foreign Hypothetical effect of moary policies 116 Objective function ?Generally, we do not like inflation ??? the smaller, the better (?? the larger, the better) ?Generally we do not like unemployment ??U the smaller, the better. 117 Objective function ?F(??, ?U) ?For example, objective function ?F(??, ?U) = ?? / ?U ?Check: ?F increases with ??, decreases with ??, for any given ?U ?F decreases with ?U, for any given ?? 118 0 ?? = 0% ?U = % ??* = 2% ?U* = % 8/7 5/6 ?? = % ?U = % ??* = % ?U* = % 5/6 1 ?? = 1% ?U = 1% ??* = 1% ?U* = 1% 1 8/7 ?? = 2% ?U = % ??* = 0% ?U* = % 0 Some What Restrictive Some What Restrictive Very Restrictive Very Restrictive Home Foreign Suppose the objective function is ??/?U 119 Other objective functions ?F(??, ?U) = (?? + ?U) ?Check: ?F increases with ??, decreases with ??, for any given ?U ?F decreases with ?U, for any given ?? ?., consistent with our desired properties of government objectives. 120 Additional Readings ?Chapter 19 of Krugman Obstfeld has a historical account of what we have been learned since 1973. ?Frankel, Jeffrey A. (1999): ―No Single Currency Regime is Right for All Countries or at all Times,‖ Essay in International Finance No. 215, International Finance Section, Department of Economics, Princeton University, Princeton, New Jersey. 121 TradeWeighted Exchange Value of . Dollar vs currencies of a broad group of major . trading partners 0204060801001201401973 1974 1976 1977 1979 1980 1982 1983 1985 1986 1988 1989 1991 1992 1994 1995 1997 1998Source: FRB St. Louis, FRED database. 122 Effective exchange rate (Trade weighted) indices for HK dollars (Nov 1983 = 100) 90100110120130140150160Dec80 Dec82 Dec84 Dec86 Dec88 Dec90 Dec92 Dec94 Dec96Source: Hong Kong Monthly Digest of Statistics. 123 謝謝觀看 /歡迎下載 BY FAITH I MEAN A VISION OF GOOD ONE CHERISHES AND THE ENTHUSIASM THAT PUSHES ONE TO SEEK ITS FULFILLMENT REGARDLESS OF OBSTACLES. BY FAITH I BY FAITH