ECON 3580 Lecture Notes - Lecture 25: Capital Flight, Currency Crisis, Deposit Insurance
17 Jul 2018
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Document Summary
Expectations about an economy often change when other economies suffer from adverse events. International crises may result from contagion: an adverse event in one country leads to a similar event in other countries: the importance of having adequate official international reserves: Official international reserves are needed not just for a current account deficit, but more importantly to protect against capital flight due to speculation and expectations about financial crises. China, russia, india, brazil, and other countries have increased their holdings of official international reserves since their crises: countries that maintain fixed exchange rates, like china, have an additional reason to hold large quantities of reserves. Potential reforms: policy trade-offs: countries face tradeoffs when trying to achieve the following goals: Autonomous monetary policy devoted to domestic goals: generally, countries can attain only 2 of the 3 goals, and as financial assets have become more mobile, maintaining a fixed exchange with an autonomous monetary policy has been difficult.
