International Business. Crises and Exchange rate Essay

International Business. Crises and qualify rate - Essay sampleEven if there is no financial agency, a goernment can create an inflation/debt crisis by excessive spending financed by interior(prenominal) and international borrowing. Mutatis mutandis, the same considerations apply to a central verify that has the same degree of strictness as the currency venire. (Betts, C. and Devereux, M, 2000)Second, world securities markets might crash as, for example, in October 1987 or in the October 1989 mini-crash. Many countries central banks expanded their stocks of high-powered money to provide liquidity to markets as investors fled from equities and integrated bonds and to high-quality assets such as U.S. T-bills and T-bonds. A currency board is ill-equipped to handle this type of crisis. At a time when it need to increase liquidity by expanding the domestic supply of money, a currency board is likely to have domestic currency presented for conversion to the reserve currency, as inter national investors who fled to U.S. government securities did in the 1987 and 1989 crises. This flight reduces the stock of domestic currency as well as that part of the surface areas international reserves that the currency board holds. In turn, domestic banks ar less willing to provide liquid assets, and depositors are more than interested in holding the reserve currency directly (or liabilities of the reserve-currency country). (Jan Winiecki, 2002).A domestic monetary agency parallel to the currency board might expand liquidity, as measured by the domestic money stock, through open market operations. There may well be a flight from domestic assets to reserve currency assets. The monetary agency can pertain the exchange rate by selling reserve currency obtained from selling its own liquid holdings denominated in the reserve currency or by borrowing reserve-currency assets, either commercially from foreign banks or from the reserve-currency central bank. A small country with o nly a brief track record and low international holdings will likely husking it difficult to preserve the exchange rate parity a monetary agency that has the holdings and power to preserve the parity is likely also to have the power to undercut currency board discipline over monetary and fiscal policy. Disturbances to Equilibrium Real Exchange Rates Third, the currency to which the board pegs may get by under pressure from output market disturbances in the reserve-currency country. An example is the pressure on the European Exchange Rate Mechanism (ERM) after German reunification to either revalue the German mark or devalue the other ERM currencies relative to the German mark. The interpretation of the September 1992 and July-August 1993 crises in the European Monetary musical arrangement is that they arose in substantial part from the reunification of Germany. German aggregate demand rose substantially more than German aggregate supply. This increase caused upward pressure on Ger man interest rates (with approximately observers arguing that the increase in interest rates was exacerbated by German reluctance to use taxes earlier than bond issuance to finance the