Index • A • banks. See also central banks Bank of England, 209 absolute PPP European Central Bank, 19, 234, Big Mac standard and, 161–164 260–262, 277 fi guring, 157 European System of Central Banks, accountability, ECB, 262 260, 270 Africa Federal Reserve Bank (the Fed), 218, international franchises in, 41 233–234 South African gold reserves, 249 International Bank for Reconstruction American-type options, 180 and Development, 215–216, 221 Andorra, 263 national central banks, 260 appreciation (revaluation) Swiss National Bank, 229–231 defi ned, 13 barter economy euro, 264 demand–supply framework, 71–75 exchange rate, 28–32 exchange rates, 22 Argentina, 235 beggar-thy-neighbor policies, 210 asset approach to exchange rate Belgium determination, 89, 99–102. See also in European monetary system, 258 MBOP in European Union, 263 asset markets, 282, 292 London Gold Pool, 222 Atlantic Charter, 214 monetary agreement, 206 Australia role in establishment of EEC, 256 dollar–dollar rate exchange, 114 bid–ask spread, exchange rate, 35–37 gold reserves, 249 Big Mac standard gold standard, 209 overview, 161–162 money market, 129–131 unrealistic expectations, 280 Austria, 205–206, 263 using to evaluate currencies, 162 autonomous monetary policy, 251 bimetallic era monetary system COPYRIGHTEDoverview, MATERIAL 204 • B • U.S. and, 204–205 world, 205–206 balance of payments (BOP), 88, 199–200. bonds, downgrading, 269 See also MBOP BOP (balance of payments), 88, 199–200. Bancor, 215 See also MBOP Bank of England, 209 226_9781118523896-bindex.indd6_9781118523896-bindex.indd 293293 33/26/13/26/13 33:01:01 PMPM 294 International Finance For Dummies Bretton Woods Conference (United overview, 181–182 Nations Monetary and Financial selling, 183–184 Conference in Bretton Woods) Canada American plan, 215–216 gold standard, 209 avoiding past mistakes, 213 Medicago, 40–41 British plan, 215 Onex Corporation, 42 ideological views, 214 capital account convertibility, 219 International Monetary Fund, capital fl ow restrictions 17, 219–220 fl oating exchange rates and, 228–229 overview, 212–213 IMF allowance of, 220 setting reserve currency system, reasons for, 82 217–218 capitalism, factor in Bretton Woods Bretton Woods system. See also Bretton Conference, 214 Woods Conference carry trade, 153 collapse of, 223–225 central banks defi ned, 196 Bank of England, 209 deterioration of, 221–223 control of nominal money supply, 93–94 dollar shortage and Marshall Plan, currency board and, 234–235 220–221 direct interventions, 230–232 established at Bretton Woods dollarization, 234 conference, 217–218 European Central Bank, 19, 234, gold parity in, 247 260–262, 277 London Gold Pool, 222 European System of Central Banks, overview, 211–212 260, 270 Special Drawing Rights, 223 Federal Reserve Bank (the Fed), Britain 218, 233–234 bimetallic standard, 205 fl oating exchange rates and, 228 in European Union, 263 foreign exchange markets, 43 gold standard, 207–209 interventions, 275, 280, 282 London Gold Pool, 222 national central banks, 260 loss of superpower status, 220 Swiss National Bank, 229–231 proposal at Bretton Woods ceteris paribus conditions Conference, 215 applying real shocks to MBOP, 115–116 suspension of gold parity, 195 money demand curve, 92 Bulgaria, 263 money supply, 93–96 Business Day, 41 supply-demand framework, 73, 77–78 Businessweek, 42 chartist traders, 289 Chicago Mercantile Exchange (CME), 175 • C • China currency undervaluation, 237–238 California Gold Rush of 1849, 205 joint venture with Kellog, 41 call options soft pegs (crawling pegs), 238 defi ned, 179 Churchill, Winston, 256 exercising, 182–183 226_9781118523896-bindex.indd6_9781118523896-bindex.indd 294294 33/26/13/26/13 33:01:01 PMPM Index 295 Civil War, U.S., 204–205 convergence criteria, Maastricht Treaty classical–neoclassical school of of 1992, 259–260, 263, 277 economics (long-run analysis of convertibility in currencies (current economics) account convertibility), 219 defi ned, 94 convertible paper money, 194–195 nominal shocks, 120 covered interest arbitrage, 145–150 CME (Chicago Mercantile Exchange), 175 CPI (consumer price index), 24, 58–60 Cold War, 221, 222, 277 crawling pegs (soft pegs) combined MBOP attracting foreign investors with, changes in exchange rate equilibrium 238–241 in, 112–113 defi ned, 232 exchange rate, 113–114 general discussion, 235–238 explicit money market, 113 credit risk, FX derivatives, 177 overview, 111–112 Crimean War, 206 commodity markets, 281, 292 cross rates commodity standard system, 196 under Bretton Woods system, 217–218 common currency (euro) exchange rate, 34–35 accomplishments of Euro-zone, 265–266 Cuba, 263 challenges of Euro-zone, 266–267 Cuban Missile Crisis in 1962, 222, 277 Economic and Monetary Union, 259–260 currency. See also domestic currency European Central Bank, 260 buying and selling in spot (derivative) European Monetary System, 258–259 markets, 46–47 European System of Central Banks, 260 currency crises, 239–246 Euro-zone member states, 263–264 euro versus other currencies, 264–265 history of European Union, 256 exchange rate as price of, 22 national central banks, 260 foreign, 32–33, 35–37 optimum currency area, 256–257 seignorage, 234 versus other currencies, 264–265 speculative attack, 241 overview, 255 using Big Mac standard to evaluate, sovereign debt crisis, 268–270 162–164 value of policy coordination in, 277 variables that affect depreciation concerted intervention, 275 (devaluation), 273 conditionality, IMF, 244–245 currency board, 197, 234–235 consumer price index (CPI), 24, 58–60 currency crises consumption basket anatomy and timeline, 239–241 calculating real exchange rate, 24 IMF and, 241–246 defi ned, 12 current account, BOP, 200 consumption correlation puzzle, 288 current account convertibility contractionary monetary policy (convertibility in currencies), 219 Australian, effects of, 130–131 Cyprus, 259, 263 defi ned, 129 Czech Republic, 263 226_9781118523896-bindex.indd6_9781118523896-bindex.indd 295295 33/26/13/26/13 33:01:01 PMPM 296 International Finance For Dummies • D • foreign exchange, marking-to-market process, 177–179 debasement, 193–194 foreign exchange, options, defi cits 168, 170, 179–187 current account, U.S., 221–222 foreign exchange, speculators, 170 monetizing the defi cit, 240 foreign exchange, volatility, 276, 279 trade, American plan for managing, determining exchange rate. See also 215–216 MBOP trade, British plan for managing, 215 asset approach, 99–102 defl ationary vortex, 210 microeconomic approach, 14 demand–supply framework overshooting, 281 barter economy, 71–75 prediction rules, 14–15 comparing demand-supply model and short-run rigidities (sticky prices), MBOP approaches to exchange rate 95–96, 281 determination, 131–133 through demand–supply framework, exchange rate determination, 14–15, 76–78 14–15, 76–78, 282 devaluation (depreciation) government interventions, 82–83 defi ned, 13 growth rate, 80 euro, 264 infl ation rate, 78–79 exchange rate, 28–32 interest rate, 81–82 variables that affect, 273 versus MBOP, 89 direct interventions using alternative exchange rate, 83–85 infl uence on exchange rates, 280 Denmark, 206, 258, 263 overview, 229 depreciation (devaluation) sterilized, 230, 282 defi ned, 13 unsterilized, 230 euro, 264 dirty fl oat, 66, 229 exchange rate, 28–32 dollar variables that affect, 273 dollar shortage and Marshall Plan, derivative (spot) markets 220–221 buying and selling currency in, 46–47 questioning privileged role of, 224 call options, 182–184 as reserve currency system, 217–218 covered versus uncovered interest Smithsonian Agreement, 225 arbitrage, 146–147 dollar exchange standard (Bretton forward contracts, 171–175 Woods system). See also Bretton put options, 184–186 Woods Conference derivatives collapse of, 223–225 defi ned, 167 defi ned, 196 foreign exchange, arbitrage, 176–177 deterioration of, 221–223 foreign exchange, forward contracts, dollar shortage and Marshall Plan, 140–141, 168–170, 171–175 220–221 foreign exchange, future contracts, established at Bretton Woods 168, 170, 175–179 Conference, 217–218 226_9781118523896-bindex.indd6_9781118523896-bindex.indd 296296 33/26/13/26/13 33:01:01 PMPM Index 297 gold parity in, 247 monetary policy coordination, 19 London Gold Pool, 222 objectives, 260–261 overview, 211–212 transparency, 262 Special Drawing Rights, 223 ECON (European Parliament’s dollar market Committee on Economic and ceteris paribus conditions, 77–78 Monetary Affairs), 262 price, 76–77 Economic and Monetary Union (EMU), quantity, 76–77 259–260 dollar–euro exchange rate, 28–29, 83–85 economic development, import- dollarization, 197, 233–234 substitution strategy, 82 domestic currency Economist appreciation of, 104 Big Mac standard, 161–164 currency board, 197, 234 Swiss franc’s appreciation against euro, direct interventions, 229–230 229–232 dollarization, 197, 233 ECSC (European Coal and Steel effective exchange rate, 25 Community), 256 exchange rate as price of, 33–34 ECU (European Currency Unit), 256 fl oating, 241 Ecuador, 234 government interventions and, 82 EEC (European Economic Community), infl ation and, 159 224, 256, 257 multinational fi rms and, 13 effective exchange rate, 12, 25–26 pegged exchange rate regime, 17 effi cient markets hypothesis, 292 pegging to hard currency, 239 EFSF (European Financial Stability soft pegs, 235–236 Facility) domestic fi rms creating, 268 acquisition of foreign fi rms, 42 utilizing, 268–269 franchising, 41 empirical verifi cation, of IRP, 152 joint ventures with foreign fi rms, 41 employment factor,