Bret Ton Woods

8/6/2019 Bret Ton Woods

1/31


2/31


3/31

Y

r

Y

F

LM

IS

The initial domestic equilibrium corresponds with a BOP deficit.

If this external disequilibrium is temporary, the policy response is:

STERILIZE!

r

BB

F


4/31

Y

r

Y

F

LM

IS



STERILIZE!

r

BB

F

BB


5/31

Y

r

Y

F

LM

IS


If this external disequilibrium is ofmedium term duration, the

amount of foreign reserves may be deficient; policy response is:

BORROW FROM THE IMF!

r

BB

F


6/31

Y

r

Y

F

LM

IS


If this external disequilibrium is ofmedium term duration, the

amount of foreign reserves may be deficient; policy response is:

BORROW FROM THE IMF!

r

F

BBBB


7/31

Y

r

Y

F

LM

IS


If this external disequilibrium is FUNDAMENTAL, then:

EMPLOYDOMESTIC MACRO-POLICYTO CORRECT THE

EXTERNAL IMBALANCE

r

BB

F


8/31

Copyright (c) 1999 R. Gigengack

http://www.eco.rug.nl/medewerk/[email protected]

Y

r

Y

U

LM

IS




EXTERNAL IMBALANCE

r

BB

U

LM

YF

rF


9/31

Y

r

Y

*

LM

IS




EXTERNAL IMBALANCE

r

BB

U

LM

YF

rF

U

r

LM

IS


10/31

Y

r

Y

F

LM

IS

NOTE: It makes no sense to use FISCAL POLICYto secure external

BOP equilibrium the fall in Y is larger, and

YOU CANNOT FOLLOW UP WITH MONETARYPOLICYTO

SECURE FULL EMPLOYMENT !

r

BB

F

IS

YU

Ur


11/31

Copyright (c) R. Gigengack

http://www.eco.rug.nl/medewerk/gigengack

The Deficit Country

can face a serious policy dilemma;

it can find itself in a so-called

Meade Policy Conflict.


12/31

Y

r

Y

LM

IS

If the initial domestic equilibrium corresponds with a BOP deficit

and domestic unemployment, there is both

internal and external disequilibrium

This situation is aMEADE CONFLICT CASE.

r*

BB

FY*


13/31

Y

r

Y

LM

IS

TheMEADE CONFLICT CASEfor the deficit country can be

resolved with aDEVALUATION.

r*

BB

FY*


14/31

IS

Y

r

Y

LM

IS

TheMEADE CONFLICT CASEfor the deficit country can be

resolved with aDEVALUATION.

r*

BB

FY*

BB


15/31

Y

r

Y

LM

IS

But the deficit country may be in internal and external

disequilibrium withouta conflict.

r*

BB

F Y*


16/31

Y

r

Y

LM

IS

But the deficit country may be in internal and external

disequilibrium withouta conflict.

r*

BB

F Y*

LM


17/31



CASE 2:

The Surplus Country


18/31

Y

r

Y

F

LM

IS

The initial domestic equilibrium corresponds with a BOP surplus.


Who cares????. if necessary, STERILIZE!

r

BB

F


19/31


20/31

Y

r

Y

F

LM

IS

r

BB

F



Maybe care a little. but there is only a slight dilemma, since

obtaining BOP equilibrium STIMULATES THE ECONOMY


21/31

Y

r

Y

F

LM

IS

r**

BB

**



Maybe care a little. but there is only a slight dilemma, since

obtaining BOP equilibrium STIMULATES THE ECONOMY

LM

YF

r


22/31



The SurplusC

ountrycan also find itself in a Meade Conflict.


23/31

Y

r

Y

LM

IS

If the initial domestic equilibrium corresponds with a BOP surplus

and domestic inflation, there is both

internal and external disequilibrium

This situation is also aMEADE CONFLICT CASE.

r*

BB

F Y*


24/31

Y

r

Y

LM

IS

But the conflict is relatively moot priority can be given to the

domestic policy objective.

Who cares if the surplus get larger???

r*

BB

F Y*

IS

LM


25/31

Y

r

Y

LM

IS

However if policy makers do care, they can obtain internal and

external balance via a currencyREVALUATION.

r*

BB

F Y*


26/31

Y

r

Y

LM

IS

However if policy makers do care, they can obtain internal and

external balance via a currencyREVALUATION.

r**

BB

F Y*

BB

IS

r*


27/31


28/31

r

Y

LM

IS

If the initial domestic disequilibrium corresponds with a BOP

surplus and domestic unemployment, there is no conflict

expansionary policy can help deal with both simultaneously!

r*

BB

Y* YF


29/31

Y

r

Y

LM

IS

r*

BB

FY*

LM

IS

If the initial domestic disequilibrium corresponds with a BOP

surplus and domestic unemployment, there is no conflict

Expansionary policy can help deal with both simultaneously!


30/31


31/31

This slide show has been designed to accompany courses in

International Economics

at the University of Groningen.

Other slide shows and animations of useful graphs for economic

analysis, especially international economics, can be viewed elsewhere

on:

HTTP://WWW.ECO.RUG.NL/~GIGENGACK

This slide show was created by: R. Gigengack 1999-2006

E-mail: [email protected]

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