Oye

1
Oye III -

• Money and finance in the
• 1930s and 1980s

2
Flexible exchange rates
Exch. rate
Inflation
Dfc
Imp ?
Curr Acct balance
Curr Acct Def
Devaluation
Exp ?
3
Fixed exchange rates
Exch. rate
Dfc
Decline in reserves
Inflation
Imp ?
Curr Acct deficit
Real appreciation
Reserves Decline
Exp ?
4
Norms of the gold standard
Deficit countries Surplus countries
Defend parity Deflate - ? int. rates - ? govt. spending Ship gold Extend credits Hold foreign reserves Dont sterilize gold inflows
Primary Norms
Secondary Norms
Do not privatize - Exchange controls
- Loans - Sliding
tariffs
Simmons 1994
5
International lending in the 1930s
loans
US surplus
German WWI reparations
UK, France WWI debts

• Collapse
• Run on the Austrian Schilling, 1931
• Run on the German RM 1931 gt default, cancellation
  of reparations
• Discrimination
• UK - Sterling bloc loans, markets, debts
• Germany - service British banks
• - not US banks, bonds

6
Breakdown and reestablishment
Breakdown

• UK 1931
• US 1933
• France 1936

7
Breakdown and reestablishment

• Reestablishment
• Tripartite Agreement 1936, further French
  devaluation
• Explanation interests changed
• costs of unilateral cooperation declined
• US, UK preferred Frances devaluation to
  commercial discrimination
• reserve holdings liquidated

8
Objections

• Circular
• Infer interests from behavior
• Explain behavior in terms of interests
• Was there cooperation, harmony or mutual
  defection after 1936?

9
1982 Debt Crisis--Origins

• Rapid expansion of sovereign lending in the 1970s
• Reaganomics
• U.S. budget deficit ? inflation, strong
• High U.S. interest rates ? strong ? high ratio
  of debt service/net exports
• 1979 oil price shock
• Overcommited capital in money-center banks no
  incentives for regional banks to lend

• Expectations shift ? credit dries up ? default

Contagion effect
10
Managing the 1982 Debt Crisis
IMF, IBRD, FED
Borrowers
Banks

• 1985 Baker plan (private, IBRD, IMF) little
  private lending forthcoming
• 1989 Brady plan
• Conclusion privatization is necessary

11
Objections

• Subsequent evidence Resumption of portfolio
  investment in 1990s after successful domestic
  adjustment
• Theoretical the debt issue area is
  fundamentally different from trade
• There is a basic commitment problem
• Lending will dry up unless the commitment problem
  is resolved

12
Macroeconomic coordination

• Spillovers are public
• 1978 Bonn Summit any effects?
• FRG delays a fiscal expansion
• 1981-1985 Reagans non-contingent strategy
• Contraction 1981-1982
• Expansion after 1982
• 1985 Plaza Accord to weaken the dollar
• Japan refuses expansionary fiscal policy
• Dollar declines because Fed lowers interest rates