European Community

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European Community
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Corruption Perception Index

• Transparency International
• Gottingen University
• Berlin, Germany
• http//www.transparency.org

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Corruption Perception Index
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2014 Corruption Perception Index
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2014 Corruption Perception Index
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2014 Corruption Perception Index
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Shapiro Chapter 3

• The International Monetary System

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Alternative Exchange Rate Systems

• Free (Clean) Float
• Managed (Dirty) Float
• Target-Zone
• Fixed Rate
• Hybrid

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Free (Clean) Float System

• Supply demand for currency
• Price level changes (inflation)
• Interest rate differentials
• Economic growth
• Exchange rates fluctuate randomly
• Adjust quickly to new information

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Managed (Dirty) Float System

• Central bank intervention
• Reduce economic uncertainty
• Impact on domestic economy
• Appreciation (reduces exports)
• Depreciation (higher inflation)

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Managed (Dirty) Float System

• Categories
• 1. smoothing daily fluctuations
• 2. leaning against the wind
• 3. unofficial pegging

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Fluctuating Value of the Yen per ,1954 - 2015
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Japan spends 4 trillion yen on currency
interventions in September -MSNBC, 9/30/03

• Japan spent more than 4 trillion yen (36.2
  billion) over the last month intervening in
  currency markets, adding to a record figure it
  has spent this year in an aggressive
  yen-weakening campaign that has been criticized
  by its trading partners.

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Japan spends 4 trillion yen on currency
interventions in September -MSNBC, 9/30/03

• That brought the total for the year to 13.48
  trillion yen (122.01 billion). The cumulative
  figure has already surpassed the previous
  full-year record of 7.64 trillion yen in 1999.

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Japan spends 4 trillion yen on currency
interventions in September -MSNBC, 9/30/03

• Japanese officials often threaten to step into
  the market to prevent excessive movements by
  the Japanese currency, whose fluctuations have a
  direct impact on profits by exporters.

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Target-Zone Arrangement

• Adjust national economic policies
• Maintain exchange rates in a band around
  official rates
• European Monetary System (EMS)

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Target-Zone ArrangementEuropean Currency Unit
(ECU)

• electronic unit of account 1979-1999
• composite currency
• twelve European countries
• exchange rate mechanism (ERM)
• originally a 2.25 range

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Target Zone ArrangementEuropean Monetary System
Central Rate
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Target Zone ArrangementEuropean Monetary System
2.25
-2.25
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Target Zone ArrangementEuropean Monetary System
2.25
-2.25
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Target Zone ArrangementEuropean Monetary System
?
2.25
-2.25
?
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Target Zone ArrangementEuropean Monetary System
Buy
2.25
-2.25
Sell
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Target-Zone ArrangementEuropean Currency Unit
(ECU)

• electronic unit of account 1979-1999
• composite currency
• twelve European countries
• exchange rate mechanism (ERM)
• originally a 2.25 range
• adjusted to a 15 range

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Target Zone ArrangementEuropean Monetary System
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2.25
-2.25
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European Monetary Union

• Maastricht Treaty (7 Feb. 1992)
• Single central bank (ECB)
• Single European currency (Euro)
• Qualification standards
• inflation
• currency stability
• national debt and deficit

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European Monetary UnionConvergence Criteria

• Inflation no more than 1.5 above avg. of three
  members with lowest rate
• L-T interest rate no more than 2 above avg. of
  three members with lowest rate
• Fiscal deficit no more than 3 of GDP
• Govt. debt no more than 60 of GDP

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European Monetary UnionAdvantages

• Lower currency conversion costs
• Eliminate risk of currency fluctuations
• Encourage trade and investment
• Efficient allocation of resources
• Coordinate monetary policy
• Similar inflation rate

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Fixed-Rate System(Bretton Woods)

• Target exchange rates
• Central bank buys or sells currency to maintain
  rate
• Coordinated monetary policy
• Same inflation rate for each country
• Sacrifices control of domestic economic policy

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The Gold Standard

• Why? Distrust of fiat (paper) money and
  governments
• Automatic adjustment mechanism
• price-specie-flow mechanism

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Reasons for Currency Crises

• Global trade links
• Integrated financial systems
• Debt policy excessive short-term debt

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Avoiding Financial Crises

• Currency controls
• Freely floating currency
• Fixed exchange rates
• Better information

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Economics UA Video

• Exchange Rates
• 1183