1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Financial Policy Chapter 33

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Laugher Curve A party of economists was climbing in the Alps. After several hours they became hopelessly lost.

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Laugher Curve One of them studied the map for some time, turning it up and down, sighting on distant landmarks, consulting his compass, and finally the sun.

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Laugher Curve Finally, he said, “OK, see that big mountain over there?” “Yes,” answered the others eagerly. “Well, according to the map, we’re standing on top of it.”

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Balance of Payments n The balance of payments is a country’s record of all transactions between its residents and the residents of all foreign countries.

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Balance of Payments n The current account is the part of the balance of payments account in which all short-term flows of payments are listed. l It includes exports and imports of both goods and services; net investment income; and net transfers.

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Balance of Payments n The capital account is the part of the balance of payments account in which all long-term flows of payments are listed. l When U.S. citizens buy foreign securities or when foreigners buy U.S. securities, they are listed here as outflows and inflows, respectively.

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Balance of Payments n The government can influence the exchange rate by buying and selling official reserves. n Official reserves – government holdings of foreign currencies.

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Balance of Payments n The buying and selling of official reserves is recorded in the official transactions account. l It is the part of the balance of payments accounts that records the amount of its own currency or foreign currencies that a nation buys or sells.

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Current Account n Balance of merchandise trade – the difference between the import and export of goods. n The merchandise trade balance is not a good summary because it doesn’t include services.

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Current Account n Trade in services is just as important as trade in goods. n The key statistic for economists is the balance of trade which is the difference between goods and services exported and imported.

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Current Account n The goods and services sent into a country don’t have to equal the goods and services sent out in a particular year. n The current account includes payments from past investments and net transfers.

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Current Account n The last component of the current account is net transfers. n Net transfers include foreign aid, gifts, and other payments to individuals not exchanged for goods and services.

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Capital Account n The capital account measures the flow of payments between countries for assets such as stocks, bonds, and real estate. n In order to buy U.S. assets foreigners need dollars, so net capital inflows represent a demand for dollars.

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Capital Account n A currency’s value is determined by both the demand for dollars to buy goods and services and the demand for dollars to buy assets.

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Capital Account n The balance of payments consists of both the capital account and the current account. n There can still be a balance of payments surplus if the capital account is in surplus and the trade account is in deficit.

17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Capital Account n The U.S. is currently a net debtor nation. n Net debtor nation – the amount foreigners own in the U.S. is greater than the amount U.S. citizens own abroad.

18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n The current account and the capital account measure the private and non-U.S. government supply of and demand for dollars.

19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n The net amount of the current account and the capital account is called: l A balance of payments surplus if quantity demanded for a currency exceeds quantity supplied. l A balance of payments deficit if quantity supplied of a currency exceeds quantity demanded.

20. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n A balance of payments deficit puts downward pressure on the value of a nation’s currency. n A balance of payments surplus puts upward pressure on the value of a nation’s currency.

21. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n A government supports its currency when it buys its own currency to hold up the currency’s price. n When it sells its currency, it is attempting to depress the value of its currency.

22. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n Because they are an accounting identity, the current, capital, and official transactions accounts must sum to zero.

23. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Official Transactions Account n The quantity of currency supplied, including government’s, must equal the quantity of currency demanded, including government’s.

24. 1987 Balance of Payments Accounts McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

25. 1987 Balance of Payments Accounts McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

26. 2001 Balance of Payments Accounts McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

27. 2001 Balance of Payments Accounts McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

28. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rates n Supply and demand determine currency exchange rates. n When comparing the currencies of two countries, the supply of one currency equals the demand for another currency.

29. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rates n In order to demand one currency, you must supply another. n Equilibrium is where the quantity supplied equals the quantity demanded.

30. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rates and the Balance of Payments n A deficit in the balance of payments means that the private quantity supplied of a currency exceeds the private quantity demanded. n A surplus in the balance of payments means the opposite.

31. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rates and the Balance of Payments n Equilibrium is where the quantity supplied a currency equals the quantity demanded.

32. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Supply of and Demand for Euros S D QSQS QDQD $1.00 0.80 0.60 Quantity of euros Price of euros (in dollars)

33. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fundamental Forces Determining Exchange Rates n Fundamental analysis – the consideration of the fundamental forces that determine the supply of and demand for currencies: l Country’s income. l Changes in a country’s prices. l The interest rate in a country. l Country’s trade policy.

34. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in a Country’s Income n When a country’s income falls, the demand for imports falls. n Then demand for foreign currency to buy those imports falls.

35. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in a Country’s Income n This means that the supply of the country’s currency to buy the foreign currency falls. n This finally leads to an increase in the price of that country’s currency relative to foreign currency.

36. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in a Country’s Prices n If the U.S. has more inflation than other countries, foreign goods will become cheaper. n U.S. demand for foreign currencies will tend to increase, and foreign demand for dollars will tend to decrease.

37. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in a Country’s Prices n This rise in U.S. inflation will shift the dollar supply to the right and the dollar demand to the left.

38. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in Interest Rates n A rise in U.S. interest rates relative to those abroad will increase demand for U.S. assets. n The demand for dollars will increase. n The supply of dollars will decrease as fewer Americans sell their dollars to buy foreign assets.

39. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Changes in Trade Policy n An increase in trade restrictions increases the price of imports. n The demand for foreign currency falls and the supply of the country’s currency falls. n One nation’s trade restrictions may lead to retaliation by other nations.

40. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rate Determination Is Complicated n Fundamentals can be overwhelmed by expectations of a change in exchange rates. n If the market expects exchange rates to change, it will become a self-fulfilling prophesy.

41. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rate Determination Is Complicated n The resulting fluctuations serve no real purpose, and cause problems for international trade and the country’s economy.

42. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Trade Problems From Shifting Values of Currencies n Large fluctuations make real trade difficult, and cause serious real consequences. n It is these consequences that have led to calls for government to fix or stabilize their exchange rates.

43. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. How a Fixed Exchange Rate System Works n The government can fix its exchange rate by exchange rate intervention. n Exchange rate intervention – buying or selling a currency to affect its price.

44. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. How a Fixed Exchange Rate System Works n Currency support is the buying of a currency by a government to maintain its value at above its long-run equilibrium value.

45. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. How a Fixed Exchange Rate System Works n A country can maintain a fixed exchange rate only as long as it has the official reserves (foreign currencies) to maintain this constant rate.

46. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. How a Fixed Exchange Rate System Works n Once it runs out of official reserves, it will be unable to intervene, and then must either borrow or devalue its currency.

47. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. A Demonstration of Direct Exchange Policy S D0D0 Q2Q2 Q1Q1 $1.00 0.80 Quantity of euros Price of euros (in dollars) D1D1 Excess supply QEQE

48. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Currency Stabilization n A more practical long-run exchange rate policy is currency stabilization. n Currency stabilization – the buying and selling of a currency by the government to offset temporary fluctuations in supply and demand for currencies.

49. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Currency Stabilization n In currency stabilization, the government is not trying to change the long-run equilibrium. n It is simply trying to keep the exchange rate at that long-run equilibrium.

50. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Currency Stabilization n Currency stabilization minimizes the possibility that the government will run out of official reserves. n If a nation runs out of official reserves, it must adjust its economy if it wants to maintain a fixed exchange rate.

51. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Currency Stabilization n Significant amounts of stabilization are impossible. n The level of official reserves is too small relative to the enormous level of private trading.

52. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Currency Stabilization n Strategic currency stabilization is often used when a government has a small level of official reserves. n Strategic currency stabilization – buying and selling at strategic moments to affect the expectations of traders, and hence to affect their supply and demand.

53. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Stabilizing Fluctuations Versus Deviating From Long-Run Equilibrium n Exchange rate intervention only works if the problem is the result of a short-run equilibrium.

54. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Stabilizing Fluctuations Versus Deviating From Long-Run Equilibrium n The government will eventually run out of official reserves if the problem is long run, or if it estimates the wrong equilibrium.

55. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Estimating Long-Run Equilibrium Exchange Rates n The long-run equilibrium rate can be estimated using purchasing power parity. n Purchasing power parity (PPP) – a method of calculating exchange rates that attempts to value currencies at rates such that each currency will buy an equal basket of goods.

56. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Criticisms of the Purchasing Power Parity Method n The difficulty with purchasing power parity is the complex nature of trade and consumption. n Purchasing power parity will change as the basket of goods changes. n Because of this there is no single measure of purchasing power parity.

57. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Criticisms of the Purchasing Power Parity Method n Purchasing power parity measures leave out asset demand for a currency, an important element of demand for currencies.

58. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Criticisms of the Purchasing Power Parity Method n The critics contend that the current exchange rate is the best estimate of the long-run equilibrium exchange rate.

59. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Alternative Exchange Rate Systems n There are three exchange rate regimes: l Fixed exchange rate – the government chooses an exchange rate and offers to buy and sell currencies at that rate. l Flexible exchange rate – determination of exchange rates is left totally up to the market.

60. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Alternative Exchange Rate Systems n There are three exchange rate regimes: l Partially flexible exchange rate – the government sometimes affects the exchange rate and sometimes leaves it to the market.

61. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of Fixed Exchange Rates n They provide international monetary stability. n They force governments to make adjustments to meet their international problems.

62. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of Fixed Exchange Rates n They can become unfixed. n When they are expected to become unfixed, they create enormous monetary instability.

63. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of Fixed Exchange Rates n They force governments to make adjustments to meet their international problems. n This is an advantage as well as a disadvantage.

64. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fixed Exchange Rates and Exchange Rate Stability n If the government picks an exchange rate that is too high, its exports lag and the country loses official reserves.

65. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fixed Exchange Rates and Exchange Rate Stability n If the government picks an exchange rate that is too low, it is paying more for its imports than it needs to and is building up official reserves. n Some other country is losing official reserves.

66. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fixed Exchange Rates and Exchange Rate Stability n At times fixed exchange rates can become highly unstable because expectations of a change in the exchange rate can force the change to occur.

67. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fixed Exchange Rates and Policy Independence n Fixed exchange rates place limitations on a central bank’s actions. n A country’s limited official reserves limit its ability to conduct expansionary monetary and fiscal policy.

68. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fixed Exchange Rates and Policy Independence n When a serious recession hits, many countries are forced to abandoned fixed exchange rates.

69. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of Flexible Exchange Rates n They provide for orderly incremental adjustment of exchange rates, rather than large, sudden jumps. n They help government in conducting domestic monetary and fiscal policies.

70. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of Flexible Exchange Rates n They allow speculation to cause large jumps in exchange rates, which do not reflect market fundamentals.

71. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of Flexible Exchange Rates n They allow government to be flexible in conducting domestic monetary and fiscal policies. n This is an advantage as well as a disadvantage.

72. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Flexible Exchange Rates and Exchange Rate Stability n Proponents argue: why not treat currency markets like any other market and let private market forces determine a currency’s value?

73. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Flexible Exchange Rates and Exchange Rate Stability n Opponents argue that flexible exchange rates allow far too much fluctuation in exchange rates, making trade difficult.

74. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Flexible Exchange Rates and Policy Independence n Flexible exchange rate regimes allow governments to be flexible in conducting domestic monetary and fiscal policy.

75. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Partially Flexible Exchange Rates n If policy makers believe there is a fundamental misalignment in a country’s exchange rate, they allow market forces to determine it.

76. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Partially Flexible Exchange Rates n If they believe the currency’s value is falling because of speculation, they step in and fix the exchange rate.

77. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Partially Flexible Exchange Rates n Partially flexible exchange rate regimes combine the advantages and disadvantages of fixed and flexible exchange rates.

78. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which View Is Right? n Which view is correct is much in debate. n In order to decide, it is necessary to go beyond the arguments and look at the history of the various regimes.

79. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which View Is Right? n Most foreign-exchange traders feel their take on the market is better than that of policymakers.

80. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which View Is Right? n When these traders know that government might enter the market, they stop focusing on fundamentals and switch to trying to guess what the regulators will do. n Such guessing-games tend to destabilize the market, not stabilize it.

81. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Which View Is Right? n Fed economists maintain that government intervention helps to stabilize currency markets.

82. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Euro: A Common Currency for Europe n In 2002, twelve European nations consummated their fixed exchange rate regime by adopting the euro as their common currency.

83. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of a Common Currency n A common currency ties the country politically together. n It eliminates the cost of exchanging currency which provides an incentive to increase trade. n It provides price transparency.

84. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of a Common Currency n A common currency makes it more likely that companies will think of Europe as a single market. n Individuals throughout the world would want to hold their assets in euros rather than dollars.

85. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of a Common Currency n Member countries have lost the ability to conduct independent monetary policy. n Adopting a common currency means giving up a part of a country’s national identity.

86. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. A Case Study: The Argentinean Currency Crisis n To control hyperinflation, the Argentinean government adopted the following policies in the late 1980s: l Limit the money supply growth. l Liberalize the economy. l End continual government budget deficits.

87. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. A Case Study: The Argentinean Currency Crisis n Given a history of broken promises by Argentinean politicians, the government needed to show it was serious about following the policy. n One way to do that was to fix the value of the peso to the U.S. dollar.

88. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. A Case Study: The Argentinean Currency Crisis n A currency board was established to maintain the value of the peso as equal to one U.S. dollar. n Currency board – establishes a fixed exchange rate, along with a fund to defend the price of the currency should it be necessary.

89. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. A Case Study: The Argentinean Currency Crisis n The plan worked – inflation dropped – the economy grew at a fast rate. n Liberalization of the economy proceeded as the government sold government assets. n Unfortunately, government budget deficits did not stop growing.

90. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. An External Shock to the Economy n In 1999, the Brazilian currency (the real) fell 40 percent against the U.S. dollar and peso. n Argentinean exports fell, imports increased, and the economy fell into a recession.

91. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. An External Shock to the Economy n Tax revenues fell increasing the budget deficit and interest rates increased significantly. n People began to lose confidence in the government to maintain the peso exchange rate.

92. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. An External Shock to the Economy n Dollars flowed out of Argentina forcing the currency board to continue to decrease the supply of pesos. n This caused the recession to worsen. n A period of political and economic chaos followed.

93. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. An External Shock to the Economy n In late 2001, Argentina defaulted on its international debt. n In early 2002, the currency board and fixed exchange rates were both dropped. n The peso lost half its value and import prices increased.

94. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Lessons from Argentina’s Crisis n A country should tie its currency to a set of currencies that closely reflect its major trading partners. n Short-run success stories must be put in the perspective of long-run effects.

95. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Lessons from Argentina’s Crisis n Limiting the money supply may be technically possible but politically impossible. n When considering fiscal policy, a country’s financial health as well as its budget deficit need to be considered.

96. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Lessons from Argentina’s Crisis n A country needs an exit strategy if it adopts fixed exchange rates. n Some institutional method of dealing with defaults and crises is needed.

97. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Financial Policy End of Chapter 33