International Monetary Policy Issues - Essay Example

IPE Questions International Monetary Relations Exchange–Rate Stability Exchange rates represent the rates at which currencies of different countries exchange. These rates are important in the formulation of better decisions as pertains to investing in a foreign country. The degree to which one invests in a foreign country or region becomes a determinant of these rates. Further, the workforce remains alert on matters of labor wages occurring for other countries. In this view, individual become cautious of taking up job positions I such countries depicting significant fluctuations of exchange rate (Liz, np). Usually, developing nations focus on stability of exchange rates with the aim of attracting investment from foreign countries. In this case, this process occurs through a fixation process that matches domestic currency to that of foreign country depicting greater stability. The US dollar remains to be the dominant global currency as various countries have pegged their domestic currencies to the dollar. Private Capital Mobility Mobility of capital refers to the capability if private funds to transfer across national or regional boundaries with eh aim of achieving higher incomes. Capital flows include transfers in banks, short-term capital and foreign direct investment (Pettinger, np). Private capital mobility depicts where the capital easily transfers from one country to another. In this case, few transactional costs appear with private capital mobility. The mobility of capital arises as determinant of various factors, mainly restrictions on currency, which greatly affect the capital flows. These factors include taxes and tariffs imposed on capital flows, and restrictions on capital flows, such as in the quantities of capital through foreign exchange restrictions (Pettinger, np). Additionally, the formulation of rules and regulations by policy makers, including the government and government-controlled public bodies and institutions, may raise the associated cost of transferring capital across national boundaries. The exchange rate volatility presents a huge challenge to the investment prospects of a foreign country with interest in investing into a particular country or region (Pettinger, np). In this view, investors may be discouraged to invest in a certain country or region due to negative speculations about the expected returns. For instance, a devaluation of the rate of exchange translates to declining profits resulting from investment activities (Pettinger, np). The effects of private capital mobility extend to a larger economy in terms of attracting foreign direct investment, allowing for easier transfer of capital in various countries, and providing for an equal platform in relation to the level of income from different countries. Developing nations gain immensely from capital inflows due to the increasing influence on labor wages. Monetary Policy Autonomy Monetary policies arise with central banks of different countries, and influence on the supply of money in these countries. The US Federal Reserve depicts a clear case of such monetary policy applications (Hall, np). When the central banks of different countries depict independence as pertains to formulation of decisions related to policies, and then they display monetary policy autonomy. This occurs based on a floating exchange rate policy. Here, the market representing foreign exchange establishes the value of a country’s currency. Fixed exchange rates put a limitation on monetary policy autonomy (Hall, np). This is common in situations where the government matches the domestic rate to a foreign currency. Through monetary autonomy, central banks stand at a better position of increasing the supply of money to encourage additional investment, as well as development. Additionally, the focus rests with the need to ensure a reduction of money supply in order to address the issue of inflation. A key advantage of monetary policy autonomy is creation of an independent environment for central banks, allowing them to experience freedom in their monetary policy formulation processes (Hall, np). This allows the central banks to induce enhanced performance and growth of an economy. Trade-Offs Between the Three Views: Theory of ‘Unholy Trinity’ The theory of ‘Unholy Trinity’ describes the existing trading relationship between policy autonomy and pegged rates of exchange. In this case, the use of the principle allows a country to focus on two of the total three approaches existing for policy formulation. The three strategies including monetary autonomy policy, pegged exchange rate policy and capital flows become sought after by countries as they strive to enhance economic growth and development (images, p. 151). The last century of economic history points to a gradual increase in the integration of the global market. This demands that concerned nations face challenges in formulating complex decisions relating to finance, and incorporating high levels of risks. Various sentiments arise as pertains to the management of the national currency. Significant levels of uncertainty depict for countries while controlling on the currency rates. Political institutions arise as key determinants of monetary policy formulations. There exist tensions between the three policies approaches. In most political settings around the world, great focus directed towards monetary autonomy (images, p. 150). The political domain provides a cleat platform for resolves of the trade-offs occurring for the ‘unholy trinity’. With this view, politics become an integral part of various domestic and global exchange rate transactions. Regional and national boundary transactions arise as main causes of the formulation of exchange rate frameworks. Political integrations within a national’s boundaries become an important aspect of consideration as pertains to exchange rate systems of a country. Historical accounts point to the gold standard era arising in the late nineteenth century, which formed the basis for formulation of monetary policies. Foreign Debt and Financial Crises Moral Hazard The term moral hazard generates from business activities relating to provision of insurance services. The concept of moral hazard becomes significant as pertains to past financial crises. An understanding of this background provides a clarification of its origin. The use of the term as a concept adopted by the British insurance firms in the 1700s and 1800s, points to the resulting application of the idea within the overall sector. According to Dembe and Boden (2000), the focus on in moral character as traditionally viewed depicts changes with the current focus resting on inefficiency due to misplaced uncertainty (Magnussen, p. 6). The principal-agent theory reflects the forms of risks accruing for agents as opposed to their principals. In this case, the principal’s responsibility is to delegate his/ her powers or responsibilities to the agent, another party who depicts independence from the principal. Great challenges arise with the exchange of roles from the principal to the agent (images, p. 366). Though an examination occurs as pertains to the activities of the agent, the principal becomes limited to a certain scope. Here, the agent possesses significant amounts of intellectual capital as regards arising situations and the associated operations. Ways in which States may have influenced on Moral Hazard Issue Relations with Private Banks States represent the government or governing bodies of a country. Private banking institutions offer essential services to the government including lending to them. This relationship creates a platform where the private banks stand as key stimulators of a country’s economy. In events of failure experienced with such firms, the government strives to provide for such opportunities allowing for the continued operation of the overall organization. The effect is that moral hazard costs settle with the majority citizens of the country, with few individuals achieving a lot from the transaction (Magnussen, p. 7). In this case, the private entities depicting great levels of co-operation with a country’s government in turn receive considerable support give the key role that it plays. Since 2008 The costs of moral hazard match with the existing issue in the economy affecting negatively on the growth of the economy at large. The crisis of 2008 marked the end of a financial crisis that depicts great shocks to the market. Various approaches occur with the end of the financial crisis, and the need to ensure a sustainable economy arises as a key focus of the government. Some examples of government interventions include the use of liquidity through injection into the economy (Magnussen, p. 6). Further, some governments, such as the U.S, point to an expansion in lending, which rises beyond the prices of commercial banking institutions. Relationship between the Idea That Some Banks Are Too Big To Fail and the Issue of Moral Hazard In the post-Lehman era, a common economic notion remains with the view that some institutions or organizations are too significant for the global financial framework and the presumed power of influencing on the system’s collapse. A clear example reflects AIG Company, which stands as a global leader in the stock market; a collapse of the firm translates to a possible collapse of the global stock market. This means that the public faces the costs due to the unwillingness to let large banking institutions to collapse. In this case, taxpayers remain subject to increased pressure arising from insuring against a high level of risk. On the other hand, this situation presents a case where few individuals reap huge returns at the expense of others. In view of the concept of ‘too big to fail’, moral hazards occur where an individual experiences shouldering from the possible impacts of an arising situation. In this sense, concerned entities take a less-careful step to address the arising issue. The financial sector depicts moral hazard issues with the issuance of stimulus and bailouts by the government. The financial crisis arises as key determinants of moral hazard issue that saw governments bailing out certain banking institutions. Case Study Analysis The Film: Heat Economic challenges caused by changes in climate The film depicts climatic changes with such features as melting glaciers, higher sea levels, droughts and floods. These portray great hazards to the environment at large. From the documentary, environmental issues remain prevalent even with the increased discussions on the need for ‘going green’. In the short-term economic objectives, environmental concerns remain to stand out clearly. The governments and key corporations around the world experience great challenges in the implementation of such strategies directed towards ensuring an environmental-friendly climatic condition. In this case, climatic changes affect the economies of different countries as they pose a direct impact on the financial approaches executed by governments, as well as to the scope of resource allocation. Possible Government Intervention Approaches Addressing Issue of Climate Change The government may formulate number of solutions to address the issue of climatic change generated from human activities. Political interventions in countries experiencing issues with climatic changes stand as critical for the provision of essential resources necessary for the implementation of such strategies aimed at eliminating or mitigating on increased human activities portraying a negative impact on climate. Global warming occurs as a worldwide concern, which demands for a consensus between various countries in order to strengthen the fight against declining climatic conditions. The greenhouse effects mainly appear s due to various motivating factors ranging from economic to political ones. Potential Obstacles to Implementation of Suggested Plan The execution of the above approaches relating to mutual agreements between affected parties stands as an effective strategy in response to the issue described in the film. In this case, the complexity of such agreements creates a limitation on the political constraints created with the existing differences between different countries. Additionally, the availability of resources necessary for implementation of guiding principles and regulations become necessary while ensuring the execution of plan. In this view, budgetary allocations require a significant provision for such possible issues. Ming Li article Economic Challenges Caused By Changes in Climate Climatic changes occur with various practices including the generation of emissions. In view of carbon dioxide emissions, the economy today points to an annual growth rate of 3.5%n on a global scale for the periods of 1999 to 2009 (Li, p. 293). Deforestation practices account t for significant emissions of carbon dioxide. These emissions generate the need for budgetary allocations in order to address the associated issues. With such changes in the climate, the economy of a country experiences a decline due to greater focus towards preventable situations in terms of resource allocations, mainly financial in nature. These arising situations prevent for great focus towards more sensitive areas, such as the welfare of individuals. Possible Government Intervention Approaches Addressing Issue of Climate Change Various approaches exist for governments as they seek to address the issues of climatic change. In this case, the creation of awareness o the need for improved climatic conditions coupled with corresponding regulation stands to be an effective strategy of application. The creation of awareness requires the government to acquire the necessary human capital required for the execution of the learning process (Li, p. 293). The society forms the basis of the country’s economy. In this view, recognition of the significance of suitable climatic conditions translates to a great focus towards implementing such strategies ensuring reduced or elimination of various emissions. To add to this, the government should enforce clear guidelines and regulations, which provide a form of control measure the sustenance of favorable climatic conditions. Potential Obstacles to Implementation of Suggested Plan The implementation of the proposed approaches faces several limitations. One entails the associated cost associated with the overall process. The creation of awareness to the society translates to considerable labor expenses amounts in addition to other general expenses. These costs demand for huge budgetary allocations in order to allow them to take place fully. Further, the formulation of regulatory policies and regulations requires the employment of the necessary workforce that ensures the full implementation of the exercise (Li, p. 296). Both strategies arise as having a close linkage to each other in terms of the problem under study. Resource allocation presents a complex decision making-phase that seeks to apply both approaches hand in hand. Works Cited Hall, Shane, ‘Define Monetary Policy Autonomy’, 2014. Web. http://www.ehow.com/facts_5815794_define-monetary-policy-autonomy.html. accessed May 8, 2014 Li, Minqi. ‘The 21st Century Crisis: Climate Catastrophe or Socialism. Review of Radical Political Economics’, 2009, Vol. 43 (3): pp. 289-301 Liz, F. 2014. Definition of Exchange Rate Stability, 2014 Web. http://www.ehow.com/about_5312051_definition-exchange-rate-stability.html Pettinger, T. Feb 6, 2012. Capital Mobility and Immobility. Web. http://www.economicshelp.org/blog/4946/economics/capital-immobility/ Read More