Monetary integration

Size: px

Start display at page:

Download "Monetary integration"

Claude Lawrence
5 years ago
Views:

1 Class verview 1. Gld Standard 2. Inter-wars 3. Brettn Wds 4. EMS 5. Eur Mnetary integratin Slides are largely based n Baldwin-Wyplsz s nes (textbk)

2 Back t the future: befre paper mney Until end f 19th century, mney was metallic and many currencies were circulating: exchange rates crrespnded t the different cntents f precius metal. During 19th century peple started t identify mney and cuntry and effrts were develped t put rder: this led t the gld standard. The gld standard autmatically restred a cuntry s external balance: Hume s price specie mechanism, which applies t the internal wrking f a mnetary unin: a cuntry whse prices are t high is uncmpetitive and runs a trade deficit imprters spend mre gld mney than imprters receive frm abrad stck f mney declines lng-run mnetary neutrality implies that prices will decline and the prcess will autmatically g n until cmpetitiveness is restred.

3 Back t the future: befre paper mney Gld standard was inherently stable. Als, n mnetary plicy autnmy since the stck f gld mney is determined by BP. By the late 19th century, paper mney started t exist: gld exchange standard where paper mney culd circulate internatinally, but each banknte was representing sme amunt f gld. The cntinuing autmaticity f the gld exchange standard relied n adherence t three principles, knwn as the rules f the game (i.e., cntempraries tried t implement the impssible trinity principle): 1.full gld cnvertibility at fixed price f bankntes (i.e., fixed exchange rate); 2.full backing where central bank hlds at least as much gld as it has issued bankntes (i.e., n mnetary plicy autnmy); 3.freedm in trade and capital mvements (i.e., full capital mbility).

4 Back t the future: befre paper mney Gld exchange standard was suspended in Because f war expenditures, gvernments issued debt and printed mney. During the war, prices were kept artificially stable thrugh ratining schemes; when war was ended and prices were freed, the accumulated inflatinary pressure burst: Germany, Hungary and Greece faced mnthly inflatin rates f 1000% r mre in the early 1920s. Pst-war plicymakers cmmitted t return t gld exchange standard as sn as practical: at which exchange rate? Eurpean cuntries adpted different strategies, which ended up tearing them apart, ecnmically and plitically.

5 Back t the future: befre paper mney - UK: return t a much-depreciated sterling t its pre-war gld parity, t lk the dllar in the face, which frced appreciatin: a landmark plicy mistake that led t vervaluatin. Restring cmpetitiveness required deflatin thrugh a lengthy and painful prcess. The Bank f England withdrew frm the gld standard in France: intended t return t its pre-war gld parity, but sn lst cntrl f inflatin fr several years. It did in 1928 with an undervalued exchange rate, which led t surpluses. It had t devalue nce UK and USA abandned the gld standard. - Germany: never cnsidered returning t its pre-war level. It suffered ne f histry s mst vilent hyperinflatins. The German ecnmy started t pick up just when it was hit by the Great Depressin. In the end, it stpped cnversin f marks int gld and freign currencies an extreme frm f capital cntrls and impsed ever-widening state cntrls n imprts and exprts.

6 Back t the future: befre paper mney

7 Back t the future: befre paper mney When gld standard cllapsed, exchange rates were left t flat. Each cuntry (except Germany) sught relief by letting its exchange rate depreciate t bst exprts: tit-fr-tat depreciatins, which led t prtectinist measures. The result was plitical instability, leading t war. Amng the many lessns learnt, tw are relevant fr the mnetary integratin prcess: - freely flating exchange rates result in misalignments that breed trade barriers and eventually undermine prsperity; - management f exchange rate parities cannt be left t each cuntry s discretin: need f a system.

8 Brettn Wds Brettn Wds cnference established an internatinal mnetary system based n paper currencies: - gld as ultimate surce f value, but the dllar as the anchr f the system (with US gvernment guarantying its value in terms f gld); - all ther currencies defined in terms f the dllar; - IMF supervising cmpliance and prviding emergency assistance; - mst cuntries made abundant use f capital cntrls. System unravelled with lifting f capital cntrls in the 1960s: exchange rates had t be freed r authrities had t give up mnetary plicy autnmy. Mst gvernments (except Canada) refused t make such a chice. The dllar gradually became vervalued and: - USA suspended the dllar s cnvertibility int gld in 1971; - fixed but adjustable principle was fficially abandned in 1973.

9 Eurpe s snake in the tunnel First Eurpean respnse t the cllapse f Brettn Wds: Eurpean Snake = reginal versin f the Brettn Wds system t limit intra-eurpean exchange rate fluctuatins. It was a very lse arrangement and when inflatin rse due t the first il shck f , divergent mnetary plicies led several cuntries t leave the Snake. In spite f its failure, the Snake brught abut tw innvatins: - determinatin t keep intra-eurpean rates fixed, irrespective f what happened elsewhere in the wrld; - Eurpean currencies needed t be defined vis-à-vis each ther. The Snake was meant t be an island f stability in an cean f instability. The next mve was the Eurpean Mnetary System (EMS).

10 Eurpe s snake in the tunnel

11 Eurpe s snake in the tunnel

12 The Eurpean Mnetary System Heart f EMS is the Exchange Rate Mechanism (ERM): grid f agreed bilateral exchange rates, mutual supprt, jint realignment decisins, ECU.

13 The Eurpean Mnetary System N fewer than 12 realignments during 1979 and 1995

14 The Eurpean Mnetary System Realignments due t different inflatin rates:

15 The Eurpean Mnetary System As capital cntrls were lifted, realignments became increasingly destabilizing. Thus, high-inflatin and depreciatinprne cuntries tried t reduce inflatin t cnverge t the lwest rate: Germany became the standard t emulate (i.e., German mnetary plicy became the ERM standard and ther cuntries de fact surrendered mnetary plicy independence) and inflatin rates started t cnverge. N realignment between 1987 t September 1992; a system designed t be symmetric became perfectly asymmetric. Tw implicatins: - Cuntries resented the Bundesbank leadership; - Germany was unwilling t give up leadership but accepted a plitical deal in 1991: mnetary unin in exchange fr reunificatin with the frmer East Germany.

16 The Eurpean Mnetary System But inflatin differentials persisted. German reunificatin was cstly and became inflatinary, which led t cntractinary German mnetary plicy. When ther cuntries did nt fllw and referendum in Denmark rejected the Maastricht Treaty, speculative attacks targeted cuntries that were less cmpetitive: - Banca d Italia and Bank f England intervened t supprt their currencies; - attacks became s massive that Bundesbank stpped its supprt the lira and the pund withdrew frm the ERM; - speculatin shifted t the currencies f Ireland, Prtugal and Spain; cntagin then spread t Belgium, Denmark and France; - mnetary authrities adpted new ultra-large (±15 per cent) bands f fluctuatin: tight ERM was dead.

17 Cuntry specific shck Real exchange rate AD 0 AS AD AS AD 1 A 1 E I C 1 C 2 e 0 e 2 C3 E G C 4 B 1 e 1 B 3 B 2 Demand shck Real GDP Real GDP Italy Germany

18 The German unificatin shck Real interest rate Real interest rate Unificatin shck i 2 E 2 i 2 U 2 i 1 E 1 i 1 U 1 y 1 Germany IS 1 IS 2 Real GDP y 2 y 1 United Kingdm IS Real GDP

19 The Eurpean Mnetary System Pst-crisis ERM agreed in 1993 differed little frm a flating exchange rate regime (i.e., bilateral parities culd mve by 30%). One cnditin in Maastricht Treaty fr jining the mnetary unin: at least tw years f ERM membership ERM is still in use as a temprary gateway but it has been re-engineered: - parities defined vis-à-vis the eur; - margin f fluctuatin less precisely defined; - interventins autmatic and unlimited, but ECB may stp them.

20 The Maastricht Treaty The Maastricht Treaty (1991) established the mnetary unin: - it described in great detail hw the system wuld wrk, including the statutes f the ECB; - it set the cnditins under which mnetary unin wuld start; - it specified entry cnditins (mstly at German request); - fulfillment f these criteria t be evaluated by late 1997, a full year befre the eur wuld replace the natinal currencies. In the end, all the cuntries that wanted t adpt the eur qualified, with the exceptin f Greece, which had t wait fr anther tw years. On 4 January 1999, the exchange rates f 11 cuntries were irrevcably frzen and the pwer t cnduct mnetary plicy was transferred t the Eurpean System f Central Banks (ESCB), under the aegis f the Eurpean Central Bank (ECB). Eur bankntes and cins were intrduced in January 2002.

Low growth, institutions and the need for a new regional policy

Low growth, institutions and the need for a new regional policy 12.març.2018 Reitria da Universidade Nva de Lisba Cfinanciad pr Cfinanced by Lw grwth, institutins and the need fr a new reginal plicy Andrés Rdríguez-Pse Lndn Schl f Ecnmics 1 Sustained lw grwth 3 12