Int Finc - Real country applications

What does Argentina (2022) show about arbitrage?

Higher domestic yields can create arbitrage opportunities even after forward premiums.

What was Argentina's Convertibility Plan?

A strict 1:1 fixed exchange rate with the US dollar.

Why did Argentina redenominate its currency?

To combat hyperinflation and restore confidence.

What happened during the Tequila Crisis?

Banking crisis and reserve loss while defending the peg.

What does Argentina illustrate about credibility?

Weak credibility → high risk premiums → unstable peg.

What strategy did Latvia use in 2009?

Internal devaluation (austerity + wage cuts).

What was Latvia’s outcome?

Severe economic contraction.

What strategy did Poland use?

Floating exchange rate with monetary expansion.

What does this comparison show?

Floating regimes absorb shocks better than fixed regimes.

What triggered the UK ERM crisis?

German interest rate increases after reunification.

Why was the UK vulnerable?

Needed low rates but was forced to raise them to defend the peg.

Role of George Soros?

Speculated against the pound, accelerating the crisis.

What happened after the UK left the ERM?

Lower interest rates and economic recovery.

What theory does Soros illustrate?

Speculative attacks and loss of monetary autonomy.

What is Denmark’s exchange rate regime?

Peg to the euro.

What happens to Danish interest rates?

Closely follow ECB rates.

What does Denmark show about pegs?

Even credible pegs still carry risk premiums.

What caused Peru’s crisis?

Large fiscal deficits under Alan García.

What policy mistake was made in Peru?

Monetising debt (printing money to fund deficit) while maintaining a fixed exchange rate.

Outcome of Peru’s policy?

Reserve depletion → collapse of the peg → sharp depreciation.

How does China manage its exchange rate?

Uses sterilisation and capital controls.

What are sterilisation bonds used for?

To offset money supply effects of reserve accumulation.

What do China and India show about global cycles?

Capital controls can preserve monetary independence.

What was the Gold Standard?

Countries pegged currencies to gold.

Main benefit of the Gold Standard?

Increased trade and stability.

What was the Bretton Woods system?

Fixed exchange rates tied to the US dollar.

Why did Bretton Woods collapse?

US abandoned gold convertibility.

What did the US Civil War show about exchange rates?

Currency value responded to news about war outcomes.

Iraq War example insight?

Political news can rapidly shift exchange rate expectations.

What does the coffee example illustrate?

Arbitrage eliminates price differences across countries.

What is trade dollarization?

International trade priced in a dominant currency (USD).

Why does trade dollarization occur?

Stability and global acceptance of the dollar