The interest rate cycle is closely related to the economic or trade cycle. In theory, movements in interest rates should mirror the economic cycle. If the economy is growing strongly and inflationary pressures increasing – Central Banks will increase interest rates to slow down the economy and prevent inflation. If the economy enters into recession …
Readers question: what are the advantages and disadvantages of devaluation? Devaluation is the decision to reduce the value of a currency in a fixed exchange rate. A devaluation means that the value of the currency falls. Domestic residents will find imports and foreign travel more expensive. However domestic exports will benefit from their exports becoming …
A devaluation means there is a fall in the value of a currency. The main effects are: Exports are cheaper to foreign customers Imports more expensive. In the short-term, a devaluation tends to cause inflation, higher growth and increased demand for exports. A devaluation in the Pound means £1 is worth less compared to other …
A current account deficit occurs when the value of imports (of goods, services and investment income) is greater than the value of exports. There are various factors which could cause a current account deficit: 1. Overvalued exchange rate If the currency is overvalued, imports will be cheaper, and therefore there will be a higher quantity …
A current account deficit means the value of imports of goods/services / investment incomes is greater than the value of exports. It is sometimes referred to as a trade deficit. Though a trade deficit (goods) is only part of the current account. If there is a current account deficit, it means there is a surplus …
A fixed exchange rate occurs when a country keeps the value of its currency at a certain level against another currency. Often countries join a semi-fixed exchange rate, where the currency can fluctuate within a small target level. For example, the European Exchange Rate Mechanism ERM was a semi-fixed exchange rate system. Summary The idea …
Definition – Hot money flows refer to capital flows moving to countries with higher interest rates and/or expected changes in exchange rates. Example of hot money flows For international investors, there are substantial gains to be made from moving money between different countries with different interest rates. Suppose the EU and UK both have an …
The J Curve effect a depreciation in the exchange rate can cause a deterioration of the current account in the short-term (because demand is inelastic). However, in the long-term, demand becomes more price elastic and therefore, the current account begins to improve. The J-Curve is related to the Marshall-Lerner condition, which states: If (PED x …