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Germany, Greece, Japan

Germany, Greece, Japan. STRT 571 – Quinn/Vreeland. Germany. how are inflation and exchange rates related?. Capital mobility (open flows to FDI, e.g.)  Exchange Rates Domestic Regimes Monetary Fixed/Floating &

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Germany, Greece, Japan

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  1. Germany, Greece, Japan STRT 571 – Quinn/Vreeland

  2. Germany

  3. how are inflation and exchange rates related? Capital mobility (open flows to FDI, e.g.)  Exchange Rates Domestic Regimes Monetary Fixed/Floating & Fiscal Policy Management (inflation, employment)

  4. key determinants of XR • PPP differences – ‘law of one price” -long run, “Walmart” effect, $9 apples Current account deficits or surpluses • Presence or absence of capital controls -China, extensive outward restriction -US, UK = zero restrictions (+/-) • Government monetary policies/inflation -interest rates (Brazil case) • Fiscal policies (debt or surplus); gov debt • Investor expectations (‘VaR’; sharks; ir parity) • Government exchange rate ‘regimes’ • Interest rate parity (covered vs uncovered) • a*b*c*d*e*f*g = extremely complicated calculations

  5. Germany, the ERM, and Central Banks 1) How is Germany paying for the reunification of the West and East, and why? 2) the Bundesbank must choose on July 16, 1992 what to do about its core interest rate. What are the arguments for and against raising interest rates? 3) How did George Soros make a billion USD? 4) What are the twin goals of the U.S. Federal Reserve? Q’s

  6. BoP conventions (ex. 6 in Germany; ex’s 3&4 in Japan)always follow who gets the cash; cash = + • Capital/Financial accounts (FDI, portfolio, transfers of ownership of fixed assets) • Capital transferred out of a country is an asset, but is noted in the BoP as a debit (because the cash left the country) • Capital transferred in is a liability, but is noted as a credit (because cash entered the country) • the current + capital/financial accounts should = zero, but rarely do. China, e.g., in 2000 had a current account surplus of $20.5 billion, a $2 billion ‘surplus’ (=liabilities) in capital accounts, & $12 billion in errors and omissions • Size of ‘errors and omission” indicates capital flight or unrecorded migrant remissions, among other things

  7. from JRV: “Answer: Democracy” Growing #’s of democracies Few democracies Fixed exchange rates + Open capital flows Degree of global capital mobility Fixed exchange rates + Capital controls Floating exchange rates + Open capital flows 1870 Interwar period 1971-3 1944

  8. Mr. Major and Black Wednesday • Q: “Are you satisfied or dissatisfied with the way Mrs Thatcher / Mr Major / Mr Blair is doing her / his job as Prime Minister?” • MORI polls • Thatcher Thatcher Major Blair Blair Blair • 79-83 83-87 92-97 94-97 97-01 01-04 • No. of monthly polls 42 43 60 32 48 35 • Number of polls • where satisfaction 12 8 5 32 40 8 • greater than • dissatisfaction • Number of polls 29 34 55 0 7 25 • where dissatisfaction • greater than satisfaction • % negative 69% 79% 92% 0% 15% 71% • http://www.ipsos-mori.com/publications/mag/tony-blair-10-years-on.shtml

  9. Current accounts, 2008Greece “restated” by IMF = -$50.1 billion

  10. A Greek Tragedy? Keep an eye on Finland and Hungary too!

  11. Japan Italy Greece US EU India Germany China

  12. Brussels, 11 April 2010Statement on the support to Greece by Euro area Members States • Following the statement by the Heads of State and Government of the Euro area on 25 March, Euro area Members States have agreed upon the terms of the financial support that will be given to Greece, when needed, to safeguard financial stability in the Euro area as a whole. • Euro area Members States are ready to provide financing via bilateral loans centrally pooled by the European Commission as part of a package including International Monetary Fund financing. The Commission, in liaison with the ECB, will start working on Monday April 12th, with the International Monetary Fund and the Greek authorities on a joint programme • The programme will cover a three-year period. The euro area Member States are ready to contribute for their part up to € 30 billion in the first year to cover financing needs in a joint programme to be designed with and cofinanced by the IMF. • A charge of 300 basis points will be applied. A further 100 basis points are charged for amounts outstanding for more than 3 years. In conformity with IMF charges, a one-off service fee of maximum 50 basis points will be charged to cover operational costs. For instance, as of April 9th, for a three year fixed-rate loan granted to Greece, the rate would be around 5%.

  13. Estimates of unit labor cost in Indian and US firms from data in the case Data from “Indian Software Industry in 2002, p. 11 for wage rates and Exhibit 10 for productivity data 36

  14. Japanese automakers: 1) What challenges did the leading Japanese automakers face in 1984-1985, and again in 1994-1995? Why did these challenges emerge? 2) How well did the Japanese automakers face the challenges in 1984-85? What will they have to do differently in 1994-95? 3) What lessons can other firms take from the response of Japanese firms to Endaka? 4) what lessons for China Q’s

  15. Japanese reserves source: IMF

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