POL 3 Lecture Notes - Lecture 13: George Soros, Exchange Rate, Devaluation
POL 003
11/14/17
Lecture 13
International Monetary Relations
1. Overview
a. Core Concepts in Monetary Relations
i. How do countries determine the value of their currency relative to other
countries? )hat types of monetary systems exist?
b. Politics of Monetary Relations
i. )hat are the tradeoffs of strong versus weak currencies? )hen might a
weak currency be beneficial? Strong currencies aren’t always better!
c. Monetary Regimes
i. How do countries coordinate their monetary policies and achieve
monetary stability on a multilateral basis?
d. Pu””le: How did George Soros get so rich?
i. Extremely wealthy politically active liberal philanthropist
2. Terminology and Basic Concepts
a. Monetary stability as a
public good
i. )ant to be able to make transactions in a relatively practical way
ii. Can’t exclude someone from using money
b. Exchange rate and value of currency
i. Depreciation/appreciation floating rates
1. Rates determined by supply/demand, not set rates
ii. Devaluation/revaluation fixed rates
1.
Revaluation
- in a fixed exchange rate system, a deliberate
increase in the value of a currency relative to foreign currencies
2. Ex. the Bahamas dollar is worth THIS many US dollars
a. Devaluing - 2 bahamas dollar for every US dollar
b. Revaluating - 50 bahamas cents for every US dollar
3. Fixed rates/value of currencies are usually set and doesn’t change
for a very long time, and if it does change, it is a big deal
c. A variety of exchange rate systems:
i. Fixed/pegged
1. Usually set for a long time
2. Fixed - you fix the value of your currency to another country’s
currency
a. Your currency depends on the value of the other country’s
currency
b. The US dollar is the currency that is most pegged to
c. )ant a country that is financially stable to peg currency to
ii. Floating
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1. Determined by demand for currency
2. Supply/demand - the more people want something, the supply will
go down and cost will increase
3. If people want currency, such as wanting to invest in US, demand
for US currency will go up
iii. Adjustable peg
1. In between fixed/floating currency
2. )ant currency to float a little, but don’t want it to float too much
a. Might set range/band in which currency can float
b. Might use this is a country’s economy is smaller/fluctuates,
but don’t want currency to fully plummet
c. )ant to take advantage of other countries’ currencies, but
want to be able to adjust your own
3. Ex. China, North Africa, Middle East
iv. Dollari”ation/substitution
1.
Dollari”ation
- adoption of a foreign currency in place of a national
currency aka currency substitution
2. )e’re no longer going to have our own currency, we’re just going
to use another country’s currency
3. Ex. Panama; usually smaller countries
d. Monetary policy, interest rates, and currency valuation
i. Higher rates → more demand → conversion
1. Conversion process increases demand, leads to increase in price
of currency
ii. Lower rates → less demand → money supply
1. Increasing interest rates increases demands for investments
iii. Foreign exchange reserves
1. Governments use their reserves to purchase up their own money
supply, because there will then be less supply outside, and thus
more demand, increasing value of currency
3. Exchange Rates, Trade, and Investment
a. )hy do exchange rates matter for foreign direct and/or portfolio investment?
i. Investments often denominated in foreign currency
ii. (alue of investment varies with exchange rate
1. Ex. Nike makes investment in factory in Argentina $30mil, if
Argentina cuts exchange rate in half, the investment is now only
worth $15mil
b. How does a strong currency affect trade?
i. Strong currency makes imports cheaper
ii. But export industries are less competitive in foreign markets
c. How does a weak currency affect trade?
i. Export industries more globally competitive
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find more resources at oneclass.com
Document Summary
International monetary relations: overview, core concepts in monetary relations. Public good i. i. i. i. ii: exchange rate , )ant to be able to make transactions in a relatively practical way ii. And doesn"t change: a variety of exchange rate systems: i. 3: determined by demand for currency, supply/demand - the more people want something, the supply will go down and cost will increase. If people want currency, such as wanting to invest in us, demand for us currency will go up. 1: )ant currency to float a little, but don"t want it to float too much. 2: ex. panama; usually smaller countries, monetary policy, interest rates, and currency valuation. 1: conversion process increases demand, leads to increase in price of currency. Investments often denominated in foreign currency (alue of investment varies with exchange rate: ex. nike makes investment in factory in argentina (cid:840)mil(cid:841), if. Strong currency affect trade : how does a .