Preview 国际金融英文.ppt

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 17-* Financial Crises and Capital Flight (cont.) To attract investors to hold domestic assets (currency) at the original exchange rate, the interest rate must rise through a sale of foreign assets. Expected devaluation makes the expected return on foreign assets higher 17-* Financial Crises and Capital Flight (cont.) Expectations of a balance of payments crisis only worsen the crisis and hasten devaluation. What causes expectations to change? Expectations about the central bank’s ability and willingness to maintain the fixed exchange rate. Expectations about the economy: shrinking demand for domestic products relative to foreign products means that the domestic currency should become less valuable. In fact, expectations of devaluation can cause a devaluation: self-fulfilling crisis. 17-* Financial Crises and Capital Flight (cont.) What happens if the central bank runs out of official international reserves (foreign assets)? It must devalue the domestic currency so that it takes more domestic currency (assets) to exchange for 1 unit of foreign currency (asset). This will allow the central bank to replenish its foreign assets by buying them back at a devalued rate, increasing the money supply, reducing interest rates, reducing the value of domestic products, increasing aggregate demand, output, employment over time. 17-* Financial Crises and Capital Flight (cont.) In a balance of payments crisis, the central bank may buy domestic bonds and sell domestic currency (to increase the money supply) to prevent high interest rates, but this only depreciates the domestic currency more. the central bank generally can not satisfy the goals of low interest rates and fixed exchange rates simultaneously. 17-* Interest Rate Differentials For many countries, the expected rates of return are not the same: R R*+(Ee –E)/E . Why? Default risk: The risk that the country’s borrower