Slide1: Balance of Payments and Exchange Rates


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods trade in services


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods trade in services balance of trade in goods and services


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods trade in services balance of trade in goods and services income flows


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods trade in services balance of trade in goods and services income flows current transfers of money


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account Meaning of the balance of payments The current account trade in goods trade in services balance of trade in goods and services income flows current transfers of money balance on current account


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


Current account balance as % ofGDP in selected countries: 1970–2003: Current account balance as % of GDP in selected countries: 1970–2003


Current account balance as % ofGDP in selected countries: 1970–2003: UK Current account balance as % of GDP in selected countries: 1970–2003


Current account balance as % ofGDP in selected countries: 1970–2003: USA UK Current account balance as % of GDP in selected countries: 1970–2003


Current account balance as % ofGDP in selected countries: 1970–2003: USA Japan UK Current account balance as % of GDP in selected countries: 1970–2003


The Balance of Payments Account: The Balance of Payments Account The capital account


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio other financial flows (mainly short term)


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio other financial flows (mainly short term) flows to and from reserves


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio other financial flows (mainly short term) flows to and from reserves financial account balance


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio other financial flows (mainly short term) flows to and from reserves financial account balance Overall balance of payments


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


UK balance of payments: 2001 (£ millions): UK balance of payments: 2001 (£ millions)


The Balance of Payments Account: The Balance of Payments Account The capital account The financial account investment direct portfolio other financial flows (mainly short term) flows to and from reserves financial account balance Overall balance of payments Assessing balance of payments figures


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index


Slide37: Sterling exchange rates: 1980–2003


Slide38: Sterling exchange rates: 1980–2003


Slide39: Sterling exchange rates: 1980–2003


Slide40: Sterling exchange rates: 1980–2003


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index


The weights of the currencies of various countriesin the sterling exchange rate index: The weights of the currencies of various countries in the sterling exchange rate index


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate


Determination of the rate of exchange: $ price of £ Q of £ Determination of the rate of exchange


Determination of the rate of exchange: $ price of £ D by USA Q of £ Determination of the rate of exchange


Determination of the rate of exchange: $ price of £ S by UK Q of £ Determination of the rate of exchange D by USA


Determination of the rate of exchange: $ price of £ Determination of the rate of exchange S by UK Q of £ D by USA


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply


Floating exchange rates: movement to a new equilibrium: Floating exchange rates: movement to a new equilibrium € / £ S1 D1 Q of £


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 Q of £ Floating exchange rates: movement to a new equilibrium


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply differences in interest rates


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply differences in interest rates differences in inflation rates


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates: Exchange Rates The rate of exchange individual rates of exchange exchange rate index Determination of exchange rates the equilibrium exchange rate appreciation and depreciation shifts in currency demand and supply differences in interest rates differences in inflation rates relative investment prospects change in aggregate demand speculation


Floating exchange rates: movement to a new equilibrium: € / £ S1 D1 S2 D2 Q of £ Floating exchange rates: movement to a new equilibrium


Exchange Rates and Balance of Payments: Exchange Rates and Balance of Payments Exchange rates and the balance of payments: no government intervention a floating exchange rate how rates are determined by dealers automatic balancing of overall balance of payments current, capital and financial accounts may not separately balance


Exchange Rates and Balance of Payments: Exchange rates and the balance of payments: government intervention reducing short-term fluctuations using reserves borrowing from abroad changes in interest rates maintaining a fixed rate of exchange over the longer term deflation / reflation supply-side policies import controls Exchange Rates and Balance of Payments


Fixed versus Floating Exchange Rates: Fixed versus Floating Exchange Rates Advantages of fixed exchange rates certainty no speculation (if rate is absolutely fixed) prevents 'irresponsible' government policies Disadvantages of fixed exchange rates conflicts with other macro objectives danger of competitive deflations problems of international liquidity difficulties in adjusting to shocks speculation


Fixed versus Floating Exchange Rates: Fixed versus Floating Exchange Rates Advantages of free-floating rates automatic correction no problem of international liquidity insulation from external events less constraint on domestic macro policy Disadvantages of free-floating rates possibly unstable exchange rates speculation uncertainty for business but use of forward markets lack of discipline on economy


$ / £ exchange rate and £ exchange rate index: 1976-2003: $ / £ $ / £ exchange rate and £ exchange rate index: 1976-2003


$ / £ exchange rate and £ exchange rate index: 1976-2003: $ / £ $ / £ exchange rate and £ exchange rate index: 1976-2003


$ / £ exchange rate and £ exchange rate index: 1976-2003: $ / £ exchange rate and £ exchange rate index: 1976-2003 $ / £ Index 1990=100


$ / £ exchange rate and £ exchange rate index: 1976-2003: $ / £ exchange rate and £ exchange rate index: 1976-2003 $ / £ Index 1990=100


The Origins of the Euro: The Origins of the Euro Post-war regulation of exchange rates the Bretton Woods system its collapse in the early 1970s dirty floating The ERM features of the ERM the 1980s crisis in the ERM events of 1992 events of 1993 a return of calm


The Origins of the Euro: The Origins of the Euro The Maastricht Treaty the timetable for EMU the convergence criteria inflation interest rates budget deficits general government debt exchange rates Birth of the euro meeting the convergence criteria role of the European Central Bank (ECB)


European Economic and Monetary Union: European Economic and Monetary Union How desirable is EMU? Advantages of a single currency eliminating conversion costs increased competition and efficiency elimination of exchange-rate uncertainty increased inward investment lower inflation and interest rates Disadvantages of EMU political arguments adjustment to shocks problem of asymmetric shocks EU12 may not be an optimal currency area regional problems


Slide75: Fluctuations between the euro and the dollar


Slide76: Fluctuations between the euro and the dollar US interest rate


Slide77: Fluctuations between the euro and the dollar US interest rate ECB interest rate


Slide78: Fluctuations between the euro and the dollar $ / € US interest rate ECB interest rate $ / €


Globalisation and the Problem of Instability: Globalisation and the Problem of Instability Interdependence through trade international effects of changes in aggregate demand vulnerability of open economies Financial interdependence size of international financial flows international effects of changes in interest rates


Globalisation and the Problem of Instability: Globalisation and the Problem of Instability The need for policy co-ordination the search for policy co-ordination G7/G8 meetings: attempts at harmonisation but lack of convergence Difficulties in achieving harmonisation differences in budget deficits and debt interest rate divergence different internal structures of economies politicians more concerned with domestic issues


Debt and Developing Countries: Debt and Developing Countries The debt problem


Debt ratios: average of all developing countries: Debt ratios: average of all developing countries


Debt ratios: average of all developing countries: Debt ratios: average of all developing countries


Debt ratios: average of all developing countries: Debt ratios: average of all developing countries


Debt and Developing Countries: Debt and Developing Countries Origins of the debt problem borrowing to finance development the 1973/4 oil shock the 1979/80 oil shock world recession  fall in export earnings fall in commodity prices (exports) high interest rates  cost of servicing debt Rescheduling debt rescheduling official loans rescheduling commercial bank loans


Debt and Developing Countries: Debt and Developing Countries Dealing with debt structural reforms IMF structural adjustment programmes tight fiscal policies to reduce budget deficits privatisation and market liberalisation open trade policy hardship from IMF programmes debt forgiveness HIPC initiative successes / failures to date pressure to cancel debts