jay ythakkar macro policy in the world with perfect capital

7/29/2019 Jay Ythakkar Macro Policy in the World With Perfect Capital

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MACRO POLICY IN THE

WORLD WITH PERFECT

CAPITAL MOBILITY


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Macro Policy in the

world

Perfect Capital Mobility


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To try to avoid major economic shocks, such as TheGreat Depression, governments make adjustments

through policy changes they hope will stabilize theeconomy. Governments believe the success of theseadjustments is necessary to maintain stability andcontinue growth.

This economic management is achieved through twotypes of governmental strategies:

-Monetary policy

-Fiscal Policy

Macro Policy


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Monetary policy

Monetary policy is the process by which the monetaryauthority of a country controls the supply of money, oftentargeting a rate of interest for the purpose ofpromoting economic growth and stability. The official goals

usually include relatively stable prices andlow unemployment. Monetary theory provides insight into howto craft optimal monetary policy. It is referred to as either beingexpansionary or contractionary, where an expansionary policyincreases the total supply of money in the economy morerapidly than usual, and contractionary policy expands the

money supply more slowly than usual or even shrinks it.Expansionary policy is traditionally used to try tocombat unemployment in a recession by lowering interestrates in the hope that easy credit will entice businesses intoexpanding. Contractionary policy is intended toslow inflation in order to avoid the resulting distortions and

deterioration of asset values.


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Fiscal Policy

fiscal policy is the use of government revenuecollection (taxation) and expenditure (spending) toinfluence the economy. The two main instruments offiscal policy are government taxation and changesin the level and composition of taxation andgovernment spending can affect the followingvariables in the economy.

Aggregate demand and the level of economicactivity.

The distribution of income.

The pattern of resource allocation withinthe government sector and relative to the privatesector.


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Stances of fiscal policy

The three main stances of fiscal policy are:

Neutral fiscal policy is usually undertaken when an

economy is in equilibrium. Governmentspending is fully funded by tax revenue and overallthe budget outcome has a neutral effect on thelevel of economic activity.

Expansionary fiscal policy involves governmentspending exceeding tax revenue, and is usuallyundertaken during recessions.

Contractionary fiscal policy occurs when

government spending is lower than tax revenue,and is usually undertaken to pay down


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Perfect Capital Mobility

Eg:

For better understanding, the following things to beknown:

Define hot money

Determine what causes capital flow

Understand what is the balance of payment and why itmoves towards being equal to zero

Assess effectiveness of monetary and fiscal policies ineconomies with flexible/fixed exchange rate policieswith perfect capital mobility


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Hot money is a term that is most commonly usedin financial markets to refer to the flow of funds (orcapital) from one country to another in order toearn a short-term profit on interest rate differences

and/or anticipated exchange rate shifts. Thesespeculative capital flows are called "hot money"because they can move very quickly in and out ofmarkets, potentially leading to market instability.

Capital flow :

the movement of investment capital from onecountry to another for bigger returns

The variable factors are :

1) Interest Rate (major focus)

2) Exchange rate


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Balance of Payment = Current A/c + Capital A/c

Current A/c = (Exports Imports )

Capital A/c = Money that flows in and out of thecountry

BOP = 0 .?? For Perfect Capital Mobility

Eg: Imports (-5bn)

Burrows (+5bn) ( high interest rates, selling

their bonds)Initially : Capital A/c use to be 0 coz of no capital

mobility

Today : Capital inflows & outflows do exists


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Macro Policy

Fiscal

Fixed ExchangeRate

(Contacrtionary)

FlexibleExchange Rate

(Expansionary)

Monetary

Fixed ExchangeRate

(Expansionary)

FlexibleExchange Rate

(Contacrtionary)


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jay ythakkar macro policy in the world with perfect capital

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