The globalization of international finance

Three Characteristics of Globalization • Growing importance of international trade in local and domestic economies • The cost and time to move almost anything around the world is decre

Chapter 9: The Globalization of International

Finance

Three Characteristics

of Globalization

• Growing importance of international

trade in local and domestic economies

• The cost and time to move almost

anything around the world is decreasing

• Money and investment flow across

borders in sums vastly larger than only

a few years ago

International Political Economy

• Geopolitics: The relationship between

geography and the economic conditions and behavior of states that define their levels of production, trade, and

consumption of goods and services

• Geoeconomics: The relationship

between geography and politics and

their consequences for states’ national

The Rising Flow of

Capital Across Borders

• Arbitrage

• Effects of globalization:

 Decreased the control that states can have over their own currency

 Increased the level of financial

interdependence among states

• Capital mobility hypothesis

• Inequalities

The International Flow

of Finance Capital

Monetary Policy

• Manipulations by central banks

to control inflation and regulate

the economy

 Change money supply

 Manipulate interest rates

 Control inflation

 Promote economic growth and trade

ABC: Economy

Interview with Neil

MacKinnon

Click the icon to open the

movie

Questions for

Discussion

1 What effects does the weak dollar

have on the overall global economy?

2 What factors do you think will bring

about an economic recovery for the

U.S.? How about for the rest of the

world?

Exchange Rates

• Fixed exchange rate

• Floating exchange rate:

Since early 1970s

• Managed exchange rate system:

 European Monetary System

• Official exchange rate

• Devaluation

Systems of International

Financial Arrangements

System I: Classical Gold Standard

(1870–1914)

Intervening Period:

Interwar Era (1914–1944)

Intervening Period II:

Post-Bretton Woods (1971–1980s)

System II: Bretton Woods

(1946–1971)

System III: Capital Mobility

(1980s– )

Calculating the

Changing Cost

of Goods in the

Globe’s

Confusing

Currency

Exchange

System

Bretton Woods

Monetary System

• Fixed exchange rates maintained by

governments

• International Monetary Fund: Balance of

payments and

exchange-rate stability

• World Bank: Loans for economic

development

• U.S dollar: Convertible at $35 per ounce of gold

Floating Exchange

Rates

• 1971: Nixon ends dollars for gold

• End of Bretton Woods exchange rates

• Floating exchange rates

 Vary by changing economic conditions

 Problems for central banks

 Compounded by financial crises

 International cooperation to manage rates

Reforming the

International Financial Architecture

• Regional currency union

 European Union

• Gold standard

• Return to fixed but adjustable rates

• Dollarization

Questions for

Critical Thinking (1 of 2)

1 In what ways do the low politics of

international political economy and

the

high politics of international security affect each other?

2 In what ways does the international

political economy affect your life?

Questions for

Critical Thinking (2 of 2)

3 In what ways is mercantilism linked to

realism?

4 Can the United States fill the role of

hegemon?

5 What states or groups of states could

potentially assume the role of

hegemon?

Web Links

• Organization of Economic Co-Opera tion and Development