McNally: Sino-Capitalism

McNally, Christopher A. “Sino-Capitalism: China’s Reemergence and the International Political Economy.” World Politics 64, no. 4 (2012): 741–776.

Outlines the IR debate on the rise of China.  Then focuses on IPE interpretation of Sino-Capitalism in contrast to Anglo-Capitalism.  Sino-Capitalism:  "...relies on informal business networks rather than on legal codes and transparent rules.  It also assigns the Chinese state a leading role in fostering and guiding capitalist accumulation." (744)  "Central to Sino-capitalism's institutional structure is a unique duality that combines top-down state-led development with bottom-up entrepreneurial private capital accumulation" (744).

Piece goes on to place Sino-Capitalism within the varieties of capitalism literature.  It argues that the unique characteristics of this economic structure will be challenging to assimilate within the liberal economic order.  Author makes the interesting observation that China is entering the international system characterized by neoliberal globalization and other Asian countries that entered the system earlier did so  when it was more characterized by embedded liberalism.  

The article then goes on to document the moves that China is making to internationalize the yuan.  The further implications for the rise of China and US-China relations are ambiguous, but the author claims that the rise of Sino-Capitalism will continue to challenge the international financial order.

Andrews: Capital Mobility and State Autonomy

Andrews, DM. 1994. Capital mobility and state autonomy: toward a structural theory of international monetary relations. International Studies Quarterly: 193-218.

Capital mobility, it is argued in this piece, has become restrictive enought to be highlighted as a structure in the international system. This paper introduces the "capital mobility hypothesis". Also, it argues against generalizing about the effects that capital mobility will have on all states.

In exploring others who have looked at this topic: "In essence, the central claim of these theorists is that when capital is highly mobile across international borders, the sustainable macroeconomic policy options available to states are systematically circumscribed. International financial integration, so the argument goes, has raised the costs associated with pursuing monetary policies that diverge from regional or international trends. While differences in national preferences, the causal beliefs of policymakers and institutional affiliations may help shape particular patterns of adaptation, proponents of what may be termed the 'capital mobility hypothesis' maintain that changes in the external constraint confronting all states constitute a structural cause of observed shifts in the patterns of states' monetary policy behavior over time" (193-4).

"The central claim associated with the capital mobility hypothesis is that financial integration has increased the costs of pursuing divergent monetary objectives, resulting in structural incentives for monetary adjustment" (203).

Webb: International Economic Structures, Government Interests and International Coordination of Macroeconomic Adjustment Policies

Webb, MC. 1991. International economic structures, government interests, and international coordination of macroeconomic adjustment policies. International Organization: 309-342.

How does increased capital mobility effect domestic macroeconomic policy coordination measures? "When different countries pursue different macroeconomic policies, it is likely that external payments imbalances, exchange rate movements, or both will result. A number of different types of policy could be used to reconcile national macroeconomic objectives with international constraints imposed by the resulting payments imbalances or exchange rate movements...Three categories of policies are relevant" (314).

External Policies: manipulation of trade and capital controls; Symptom Management: intervention in markets to control them through reserve spending, etc; Internal Policies: adjustment of domestic imbalances between savings and consumption through fiscal and monetary intervention.

See Table 4 (338) for an overview of how different policy coordination measures changed from the 60s to the 80s.

"This article demonstrates that international coordination of macroeconomic adjustment policies was at least as extensive in the 1980s as it had been in the 1960s. Because of changes in the structure o the international economy, however, there were shifts in the pattern of policy coordination: in the 1980s, payments financing coordination was less extensive, capital controls coordination was more extensive, exchange rate coordination was as extensively pursued...and, most important, monetary and fiscal policies became the focus of coordination efforts. The pattern of the 1980s reflects the fact that when international capital mobility is high, the plight of a country facing serious external imbalances can be resolved only by adjustments to monetary and fiscal policies-either those of its own government or those of the governments of other leading countries" (340).

Grabel: Averting Crisis?

Grabel, I. 2003. Averting crisis? Assessing measures to manage financial integration in emerging economies. Cambridge Journal of Economics 27, no. 3: 317-336.

Grabel highlights five distinct types of risk that are brought about when a country adopts neoliberal policy reforms. These are outlined in Table 1 (319) and are the following types of risk: currency, flight, fragility, contagion and sovereignty. Alternative policies are then outlined in Table 2 (322).

Alves, Ferrari and Paula: The Post Keynesian Critique of Conventional Currency Crisis Models

Alves, AJ, F Ferrari, and LF de Paula. 2000. The Post Keynesian critique of conventional currency crisis models and Davidson's proposal to reform the international monetary system. JOURNAL OF POST KEYNESIAN ECONOMICS 22, no. 2: 207-226.

Efficient market theory provides an account of financial crises that focuses on poorly performing economic fundamentals, whether or not speculators are herding or following their own rational behavior. This post-Keynsian approach is quite different in that it focuses on the impossibility of ever fully knowing what the fundamentals are, and thus not being able to ever fully adjudicate as to exactly how the causes of the financial crisis were fundamental related. Thus, speculation is a constant and foundational part of market activity as it is currently organized.

Abdelal: Writing the Rules of Global Finance

ABDELAL, R. 2006. Writing the Rules of Global Finance: France, Europe, and Capital Liberalization. Review of International Political Economy 13, no. 1: 1-27.

Capital controls and their promotion: Why was it true that capital controls formed the cornerstone of the monetary system after WWII but were sacrilegious in the late 90s? This paper attempts to tell that story. There is a difference between how US and European leaders presented the promotion of global capital. The Europeans wanted a more globally managed diffusion of finance while the US was much more keenly interested in an ad hoc approach. The standard story focuses on the role of the US in promoting international finance; this story focuses much more on the European players.

Wibbels and Arce: Globalization, Taxation, and Burden-Shifting in Latin America

Wibbels, E, and M Arce. 2003. Globalization, Taxation, and Burden-Shifting in Latin America. International Organization 57, no. 01: 111-136.

This paper explores the relationship of taxation policy in Latin America and the possible effects of globalization. "The question becomes: If capital flows and deregulation cause burden-shifting, are governments that reform tax systems rewarded with greater flows? We hypothesize that capital flows do respond to tax policy, but that markets evaluate tax systems as a whole, not just capital's burden of taxation"

The rosy assessment of tax policies that come out of Europe cannot be generalized to the rest of the world. Short-term capital needs require clear signals of country intention to be generated. This having been said, it is not entirely a dire situation for all developing countries, and there is still national room for movement and adjustment.

"In sum, globalization seems to bring a mixed bag for policymakers; it brings a broad set of constraints onto the outlines of policy but provides room for policy choices therein. The most direct evidence of this flexibility is the fact that longer-term markets seem to be less interested in the relative share of taxes paid by capital than in how market friendly tax systems are as a whole. While net capital flows have not rewarded shifts to increase the burden of taxation on labor, these flows have rewarded market-oriented reforms of tax systems. Thus, national policy-makers can attract capital by streamlining tax codes, eliminating distortionary taxes on trade, or increasing the efficiency of existing taxes, rather than contributing to ongoing trends in inequality by eliminating progressive components of tax codes" (131-2).

Rudra and Haggard: Globalization, Democracy and Effective Welfare Spending in the Developing World

Rudra, N, and S Haggard. 2005. Globalization, democracy, and effective welfare spending in the developing world. Comparative Political Studies 38, no. 9: 1015.

"The results show that social spending in 'hard' authoritarian regimes is more sensitive to the pressures of globalization than in democratic or intermediate regimes" (1015; from abstract).

"Our findings cast substantial doubt on the hypothesis that globalization necessarily has an adverse effect on welfare spending in developing countries. We find that political institutions and the rules governing political competition matter. In the face of increasing trade openness, in particular, authoritarian regimes are less generous than democracies with respect to social spending and do worse with respect to several key social performance indicators. Also of significance, we find that under conditions of globalization, 'intermediate' authoritarian regimes show different social spending patterns than 'hard' authoritarian regimes and in some cases, behave more similar to democracies" (1017).

Rudra, N. 2008. Welfare states in developing countries: unique or universal? The Journal of Politics 69, no. 02: 378-396.

Rudra further promotes a distinction between three types of welfare states in LDCs: productive welfare (promote market development), protective welfare (protect select interest groups) and combinations of the above.

Wibbels: Dependency Revisited

Wibbels, E. 2006. Dependency Revisited: International Markets, Business Cycles, and Social Spending in the Developing World. International Organization 60, no. 02: 433-468.

"While increased exposure to the global economy is associated with increased welfare effort in the OECD, the opposite holds in the developing world. These differences are typically explained with reference to domestic politics. Tradables, unions, and the like in the developing world are assumed to have less power or interests divergent to those in the OECD-interests that militate against social spending. I argue that such arguments can be complemented with a recognition that developed and developing nations have distinct patterns of integration into global markets. While income shocks associated with international markets are quite modest in OECD, they are profound in developing nations. In the OECD, governments can respond to those shocks by borrowing on capital markets and spending counter-cyclically on social programs. No such opportunity exists for most governments in the developing world...Thus, while internationally-inspired volatility and income shocks seem not to threaten the underpinnings of the welfare state in rich nations, it undercuts the capacity of governments in the developing world to smooth consumption (and particularly consumption by the poor) across the business cycle" (1; from abstract).

"More specifically, I argue that exposure to international markets affects social spending in developing nations through two steps: first, by increasing the volatility of domestic economies and exposing them to severe business cycles; second, by inspiring pro-cyclical fiscal responses to downturns that imply cuts in social spending" (3).

Iversen and Cusack: The Causes of Welfare State Expansion

Iversen, Torben, and Thomas Cusack. 2000. The Causes of Welfare State Expansion: Deindustrialization or Globalization? World Politics 52: 313-349.

"It is commonplace to argue that the increasing openness of national economies has meant growing economic insecurity. This insecurity once supposedly fueled demand for larger welfare spending as a form of insurance. The rising tide of globalization, however, is now widely seen as a hindrance to a government's ability to meet these demands and even as a cause of government cutbacks. An alternative view combines this 'second image reversed' with a concern for the political power of labor and the left. This revisionist perspective suggests that the challenges promoted by globalization when met by strong left-labor power within the domestic political system combine to produce a compensation strategy that entails a large and vibrant welfare state. This paper challenges both these views. Our argument, in short, is that most of the risks being generated in modern industrialized societies are the product of technologically induced structural transformations inside national labor markets. Increasing productivity, changing consumption patterns, and saturated demand for products from the traditional sectors of the economy are the main forces of change. It is these structural sources of risk that fuel demands for state compensation and risk sharing" (313).
The economic structure of employment has shifted dramatically. There is no longer such a strong focus on agriculture or industry, two sectors that previously were quite important. This paper contends that governments have responded to this change in three ways: 1| governments have promoted the movement towards jobs in service sectors and have compensated those who take this risk; 2| promote employment in public services; 3| have not promoted public or private opportunities and have promoted things like early retirement.

"The argument that globalization leads to welfare state expansion rests on two causal mechanisms. First, trade and capital market integration is said to expose domestic economies to greater real economic volatility, which implies higher income and employment risks for workers. Second, greater labor- market risks are hypothesized to generate political demands for expansionary spending policies that will cushion and compensate people for such risks" (317). This is strange, as international labor market risk may be a substantive reality, but the most important question is whether this international labor market risk is greater than the domestic labor market risk. The authors do not find increased labor market volatility in the countries explored during this period, thus brining previous analyses into question.

"Our results strongly suggest that deindustrialization, not trade or capital market openness, is the driving force behind the expansion of government spending on both transfers and services. Nevertheless, it could be objected that deindustrialization may itself be a consequence of trade and financial openness or that it was caused by, not causing, government spending" (339).

Avelino, Brown and Hunter: The Effects of Capital Mobility, Trade Openness, adn Democracy on Social Spending in Latin America

Avelino, G, DS Brown, and W Hunter. 2005. The Effects of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980-1999. American Journal of Political Science 49, no. 3: 625-641.

"Empirical studies measuring the impact of globalization on social spending have appeared recently in leading journals. This study seeks to improve upon previous work by (1) employing a more sophisticated and comprehensive measure of financial openness; (2) using a more accurate measure of trade openness based on purchasing power parities; and (3) relying on social spending data that are more complete than those used by previous studies on Latin America. Our estimates suggest that several empirical patterns reported in previous work deserve a second look. We find that trade openness has a positive association with education and social security expenditures, that financial openness does not constrain government outlays for social programs, and that democracy has a strong positive association with social spending, particularly on items that bolster human capital formation" (625; abstract).

"Several empirical patterns emerge from our analysis. First, different measures of trade openness produce radically different results: previous empirical results based on exchange rate conversions are reversed when using a trade measure based on purchasing power parities (PPPs). Second, democracy has a strong and positive correlation with social spending. Third, financial openness does not constrain government spending on social programs. Finally, trade openness has a strong positive impact on the resources devoted to educational and social security while democracy's impact on spending results from increased expenditures for education" (625-6).

The DV they use is a combination of the % of population over 65, unemployment, the level of development, growth, urbanization, democracy, financial openness, trade openness, inflation all over gdp.

Key findings: "(1) democratic regimes spend more on social programs than do their authoritarian counterparts; (2) trade, as measured by purchasing power parities, tends to enhance rather than diminish social spending; and (3) financial openness has little systematic bearing on social spending"

"Trade openness (using PPPs) has a positive (though not always statically significant) impact on aggregate spending, and a strong positive and significant association with spending on social security and education" (637).

Feenstra and Hanson: Global Production Sharing and Rising Inequality

FEENSTRA, RC, and GH HANSON. 2001. Global Production Sharing and Rising Inequality: A Survey of Trade and Wages. NBER Working Paper.

"One of the most widely-discussed public policy issues in the United States and many other industrial countries is the decline in the wages of less-skilled workers during the 1980s and 1990s, both in real terms and relative to the wages of more-skilled workers. The question is, what factors account for this change?...In this survey, we present a contrary point of view, and argue that international trade is indeed an important explanation for the increase in the wage gap. Our argument rests on the idea that an increasing amount of international trade takes the form of trade in intermediate inputs. This is sometimes called 'production sharing' by the companies involved, or simply 'outsourcing'. Trade of this type affects labor demand in import-competing industries, but also affects labor demand in the industries using the inputs. For this reason, trade in intermediate inputs can have an impact on wages and employment that is much greater than for trade in final consumer goods. As we shall argue, trade in inputs has much the same impact on labor demand as does skill-biased technical change: both of these will shift demand away from low-skilled activities, while raising relative demand and wages of the higher skilled" (1-2).

From the late 70s to the mid 90s, real wages of those with a high school education fell by 13.4%.

Haggard and Maxfield: The Political Economy of Financial Internationalization in the Developing World

Haggard, S, and S Maxfield. 1999. The political economy of financial internationalization in the developing world. Issues and Agents in International Political Economy 50, no. 1: 35-68.

What about the internationalization of financial markets in less developing countries? For a very long time, financial markets were constrained through capital controls especially in less developing countries. These authors point out that this is transitioning and explore its effects. Table 1 (36) offers a taxonomy of different types of liberalization.

In an H-O model, K and L are substitutes, so, when K constraints are lifted, the relative cost of K decreases domestically. In a labor-rich environment, this benefits labor. However, this becomes more complex in a multi-sector model, where benefits may be distributed relatively unevenly. "In sum, increases in international trade and investment ties and the opportunities opened by the deepening of international financial markets should increase interest group pressures for financial internationalization, including from foreign firms, while decreasing the effectiveness of government controls. Yet such broad changes are more useful in explaining general trends than they are in accounting for why specific countries liberalize when they do. Crises play an important role in this regard" (40). There is a positive feedback look when there is a crisis after liberalization, as those who want more liberalization may benefit from the crisis and become more powerful.

"As the integration of financial markets deepens, accelerated by the very policy changes that we have analyzed here, international constraints will play an increasingly role in future policy decisions, not only with regard to the capital account but also with reference to economic policy more generally" (62).

Obstfeld and Taylor: Globalization and Capital Markets

Obstfeld, M, and AM Taylor. 2003. Globalization and capital markets. Globalization in historical perspective: 121-187.

Over the past 50 odd years, the rise of capital markets represent a fundamental shift in the way that global economic events impact the rest of the world. This piece wonders what relationship this increasing preeminence of global financial capital has on state autonomy.

There is clear benefit from increased capital flows from the perspective of economic theory. If, however, there is clear benefit for increased capital flows, why were they not imposed after WWII? "What explains the long stretch of high capital mobility that prevailed before 18914, the subsequent breakdown in the interwar period, and the very slow postwar reconstruction of the world financial system? The answer is tied up with one of the central and visible areas in which openness to the world capital market constrains government power: the choice of an exchange rate regime" (13).

"In most of the world's economies, the exchange rate is a key instrument, target, or indicator for monetary policy. An open capital market, however, deprives a country's government of the ability simultaneously to target its exchange rate and to use monetary policy in pursuit of other economic objectives" (14). Excellent overview of the unholy trinity on 14.

"Eventually, the very success of the Bretton Woods system in spurring international trade and the related capital movements brought about its own collapse by resurrecting the 'inconsistent trinity.' For the United States, maintaining fixed exchange rates seemed to require high interest rates and slower growth; for Germany, fixed exchange rates seemed to require giving up domestic control over inflation. Even the relatively limited capital mobility that existed by the early 1970s allowed furious speculative attacks on the major currencies. After vain attempts to restore fixed dollar exchange rates, the industrial countries moved to floating rates early in 1973" (17).

There is a discussion as to the implications of capital mobility on tax structures as well as income distribution.

Garrett and Lange: Political Responses to Interdependence

Garrett, G, and P Lange. 1991. Political Responses to Interdependence: What's" Left" for the Left? International Organization 45, no. 4: 539-564.

"One line of criticism is from scholars of international political economy. Many argue that in an era of great economic interdependence there is little scope for partisan governments to pursue distinctive and independent economic policies, even if these are desirable from the standpoint of domestic political competition. Instead, the trade openness of national economies, the integration of financial markets, the competitiveness of global markets in goods and services, and, more generally, the free flow economic resources across national frontiers in response to market forces all combine to create powerful constraints against autonomous national strategies. Furthermore, this policy convergence is often seen to center on reducing government intervention in the economy and on liberating market forces, thereby severely circumscribing...the prospects for distinctive leftist strategies" (539-40).

If one generally explores the different leftist parties of Europe, they will find that they all generally embrace market oriented solutions.

"This article argues, however, that while the effects of interdependence clearly have been great, they have not eliminated partisan economic separation between the left and the right. Ever-increasing integration of and competition in the world economy have heightened incentives for all governments to attempt to promote the competitiveness of national goods and services in world markets and to increase the speed and efficiency with which national producers adjust to changes in global markets. This, in turn, has altered the policy instruments through which governments can pursue their partisan objectives. It has not, however, rendered these objectives infeasible" (541).

Hardie: The Power of the Markets?

Hardie, I. 2005. The power of the markets? The international bond markets and the 2002 elections in Brazil. Review of International Political Economy 13, no. 1: 53-77.

"The data show that international bond market investors did not exit Brazil before the elections, putting in question whether they were the source of the riser in the cost of government borrowing that Mosley and others see as indicative of the market's strength. This suggests that our understanding of the actors responsible for market movements remains incomplete. The article, therefore, challenges the idea, common within international political economy, of 'the market' as a single entity, with common actions and policy preferences. The data presented here strongly suggest 'the market' is in reality made up of multiple heterogeneous actors often lacking any unity of opinion or purpose. After Lula's election victory, market prices recovered and the data show that international investors increased their investments in Brazil, despite slower policy implementation than market practitioners desired and the new government's social agenda. This supports a questioning of the true breadth of investors' policy interests and, therefore, influence" (53; from abstract)

Mosley (2003) makes the claim that developed countries experience narrow constraints from financial markets and that developing countries experience broad constraints. This piece criticizes whether or not developing countries really experience broad constraints, arguing that Brazil was still able to operationalize its social policies. "Instead, the dramatic negative fall in market prices before the Brazilian election, which caused not only an increase in the cost of international borrowing but also a severe, at times total, reduction in its availability, suggests that the distinction between developed and developing world may more significantly be seen in the strength of overall market constraint than in its breadth" (55).

One key aspect of this study, and building upon Mosely again and others, is the disaggregation of financial and market actors and an attempt to explore their separate motivations.

Harmes: Institutional Investors and Polanyi's Double Movement

Harmes, A. 2001. Institutional investors and Polanyi's double movement: a model of contemporary currency crises. Review of International Political Economy 8, no. 3: 389-437.

"This article constructs a model of contemporary currency crises which incorporates the role played by institutional investors and the dynamics associated with Karl Polanyi's notion of the 'double movement'. Polanyi's double movement, and its recognition of the need to integrate politics with economics, is used to explain why so many governments are prone to pursue policies that lead to a speculative attack against fixed exchange rates and why virtually every modern fixed exchange rate regime has ended in crisis. Evidence on the short-term and herd behavior of institutional investors is used to explain why contemporary currency crises do not appear to be justified by underlying economic fundamentals and why these crises do so much more damage than their earlier counterparts" (389; from abstract).

There have been more frequent currency crises since the collapse of Bretton Woods in the early 70s. There are two key features of these crises: the speculative actions that attacked the economic systems of these countries were not based on fundamentals and secondly is the severity of the damage caused by these attacks.

Overview of Mundell Flemming on 391.

Dornbusch et all promote the Washington Consensus view that low taxes, free markets and solid monetary policy will cause returns in the long-run (391).

The author explores financial crises from the perspective of Polanyi's double movement. What the double movement doesn't explain is why crises have become pronounced in the 90s. For that, the author explores the increase in herd mentality that arises from increased institutional investors.

"In policy terms, the key difference between the model presented here and those expounded by proponents of the Washington consensus relates to the viability of the different policy options contained within the unholy trinity or Mundell-Fleming thesis. Where neoclassical models focus on policy autonomy and government intervention designed to stimulate employment and protect wages as the cause of currency crises, this article has located the origins of recent crises with the policy options of capital mobility and fixed exchange rates. Many observers have argued that capital mobility has become a structural feature of the global political economy. Whether true or not, the same argument would seem to apply to democracy and, in turn, to the need for governments to retain their monetary policy autonomy. If this is the case, if both capital mobility and democracy have become structural features of the global political economy, then Polanyi's insights imply that fixed exchange rates...are no longer a viable option" (432).

UPDATE:

"...under conditions of capital mobility, governments are forced to choose between either price and exchange rate stability or monetary policy autonomy; they cannot pursue both simultaneously. For example, if a government sought to maintain a stable exchange rate, it would have to forgo the option of stimulating its economy through a monetary expansion. This is the case as an expansionary policy would cause domestic interest rates to fall below foreign rates, leading to an outflow of capital and, in turn, to a depreciation of the currency. To prevent governments from pursuing such expansionary policies (which are regarded as inflationary), proponents of the Washington consensus have often promoted institutional reforms designed to pre-commit governments to policies of price and exchange rate stability. Such measures range from granting full independence to central banks, to the adoption of fixed exchange rates, to the more drastic measure of creating a currency board" (391).

Harvy: A Post Keynesian View of Exchange Rate Determination

HARVEY, JT. 1991. A Post Keynesian view of exchange rate determination. Journal of Post Keynesian Economics 14, no. 1.

There is much out there that has explored exchange rate determination, though not very well. The monetary approach tends not to perform very well. They are not broadly useful models, though they may apply in one situation.

"It is the contention of this author that elements of a theory that can successfully explain the determination of exchange prices under the flexible rate system can be developed from the writings of various Post Keynesian scholars. This paper is intended to provide a rough outline of that approach and to spur further refinement of the model" (61).

"Davidson has emphasized the role of changing expectations in an environment of uncertainty as the key to volatility" (63). "Most important is Schulmeister's contention that those creating the bulk of the demand for foreign exchange are not those needing liquidity for international merchandise trade and investment, but instead the bank trading desks themselves" (63).

There is a distinction between the short-term expectations and the medium-term expectations of investors.

Hopper: What Determines the Exchange Rate?

Hopper, GP. 1997. What Determines the Exchange Rate: Economic Factors or Market Sentiment? Business Review 5: 17-29.

"Readers of the financial press are familiar with the gyrations of the currency market. No matter which way currencies zig or zag, it seems there is always an analyst with a quotable, ready explanation. Either interest rates are rising faster than expected in some country, or the trade balance is up or down, or central banks are tightening or loosening their monetary policies. Whatever the explanations, the underlying belief is that exchange rates are affected by fundamental economic forces, such as money supplies, interest rates, real output levels or the trade balance, which, if well forecasted, give the forecaster an advantage in predicting the exchange rate" (17).

However, it doesn't seem like exchange rates are affected by short-term fundamentals. "Economists have found instead that the best forecast of the exchange rate, at least in the short run, is whatever it happens to be today" (17).

"In this article, we'll review exchange-rate economics, focusing on what is predictable and what isn't. We'll see that exchange rates seem to be influenced by market sentiment rather than by economic fundamentals, and we'll examine the practical implications of this fact...We'll also see that volatility of exchange rates and correlations between exchange rates are predictable, and we'll examine the implications for currency option pricing, risk management, and portfolio selection" (18).

Exchange rate is supposed to be determined by current levels of monetary supplies and country output. Exchange rates are determined by what amount of money can be exchanged for a similar good in a given country. The prices of those goods are determined mainly by money supply levels. If, for example, money supply raises in one country ceteris paribus, this will raise prices in that country and will make that currency exchange at a different rate with the rest of the world. The reason that overall output is taken into consideration is because, when output rises, ceteris paribus, prices will fall (there is more out there but the same amount of money to buy it) and the currency will appreciate against the world.

This is all incredibly problematic because it's an open system and fundamentals are not actually known. Also, the model is problematic because it assumes that price levels can move freely and that they are not "sticky" (19).

Other models: Dornbusch developed the overshooting model, "...in which the average level of prices is assumed to be fixed in the short run to reflect the real-world finding that many prices don't change frequently" (19). Portfolio Balance Model: "In this approach, the supply of and demand for foreign and domestic bonds, along with the supply of and demand for foreign and domestic money, determine the exchange rate" (19-20).

News about the fundamentals may be more informative than the fundamentals (20). This news would change exchange rates if it differed from market expectation.

The key: Market Sentiment Matters in exchange rate determination.

Williamson: Globalization, Convergence and History

Williamson, JG. 1996. Globalization, convergence, and history. Journal of Economic History: 277-306.

From 1850 to the present, the author highlights three main stages of global growth from the perspective of convergence. "Thus history offers an unambiguous positive correlation between globalization and convergence. When the pre-World War I years are examined in detail, the correlation turns out to be causal: globalization played the critical role in contributing to convergence" (from abstract; 277).

What is the meaning of convergence? "The critical bottom line for me is whether the living standard gap between rich and poor countries falls over time. Convergence implies an erosion in this gap, at least in percentage terms. New growth theorists call this sigma-convergence. To get sigma-convergence poor countries must grow faster than rich, an event new growth theorists call beta-convergence" (279).