PSC 116 Lecture Notes - Lecture 3: Floating Exchange Rate, International Political Economy, Portfolio Investment
Document Summary
Changes in international financial system had the most far-reaching consequences in ipe. 1) us needed fixed exchange rate in 1971. 2) government"s lifted capital movement limits in 80s and 90s -- massive increase in international capital flows. Currency trading used to be dominated by government. By 90s, trading by private actors higher than government reserves. States have 3 goals related to international monetary policy. Facilitate trade by risk of fluctuations. Allows investors to invest where returns are . Fundamental rule: impossible to attain all goals simultaneously. Ex. fixed exchange + capital mobility = domestic monetary policy responds to international market, not domestic policy goals. Shift interest rates to maintain exchange rate. Current system: capital mobility + domestic monetary policy = floating exchange rate. Exchange rate fluctuations can hurt international trade. Often used to describe economic state of international political economy. Describes a sharp divide between wealthy countries in the north and the lesser developed countries (ldcs) of the south.
