ECON 3580 Lecture Notes - Lecture 18: Reserve Currency, United States Dollar, Risk Premium
17 Jul 2018
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Document Summary
Interest rate differentials: a difference in the risk of domestic and foreign assets is one reason why expected rates of return are not equal across countries: R = r*+(ee e)/e + where is called a risk premium, an additional amount needed to compensate investors for investing in risky domestic assets: the risk could be caused by default risk or exchange rate risk. The rescue package: reducing : the u. s. & imf set up a billion fund to guarantee the value of loans made to. And reducing exchange rate risk, since foreign loans could act as official international reserves to stabilize the exchange rate if necessary: after a recession in 1995, the economy began to recover. Mexican goods were relatively inexpensive, allowing production to increase. Increased demand of mexican products relative to demand of foreign products stabilized the value of the peso and reduced exchange rate risk.
