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POLI 243 Lecture 11 Notes
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- POLI 243 (POLI)
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- McGill University (Mcgillu)
POLI 243 class notes for lecture 11
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Lecture 11 - Feb. 13th, 2019The Politics of International Monetary Relations
J. Lawrence Broz and Jeffry Frieden, “The Political Economy of Exchange Rates”
Lecture Notes
The Politics of International Monetary Relations
The Exchange Rate and Domestic Politics
Key Elements of International Monetary Policy
- Exchange rate rule
- Can be fixed or floating (where the market sets the exchange rate), or anywhere in
between the two.
- Reserves
- What you back your currency with; traditionally, to convince people that your
money is worth something. Some sort of asset that the money can be converted
into
- During the gold standard, this was gold
- Capital controls
- Refers to rules/regulations about how easily people can bring money into/out of
the country.
- Preferred means of balance of payments adjustment
- The way the countries pay off international debt, i.e. the means through which
you pay what you owe to foreigners. Often there are preferred means of making
these exchanges.
Competing Liberal Theories of Exchange Rate Policy
- Just as we saw with trade, there is a dominant approach.
- Employs a model from economics to identify society’s preferences on the exchange rate.
- Define the dominant cleavage: who wants the currency to be gaining in value vs other
currencies? Who wants the currency to be depreciating in value vs other currencies?
, Domestic Interests and the Exchange Rate
Competing notions about the dominant cleavage:
“Hard” money vs. “soft”: creditors vs. debtors
- Hard money refers to when the currency value is appreciating, or increasing in value.
- Soft money refers to money whose value is decreasing; the currency value is
depreciating.
- Creditors already have money, so they prefer hard money because they want the value of
the money that they have to increase.
- Debtors prefer soft money; they want to see the value of the currency drop
- ^This is one way of predicting what actors in this situation will do: separating
people into “creditors” or “debtors”.
Effect on trade competitiveness: “tradable” sectors vs. “non-tradable” sectors
- How the exchange rate ties to the competitiveness of different sectors in trade
- Separates society into tradable sectors or non-tradable sectors.
- Tradable sector: Exporting sector, or an import-competing sector
- Non tradable sector: industries/businesses that do not face foreign competition,
and you cannot export/provide it to foreigners with ease.
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