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Sem 5 Prep
← Open Economy MacroCurrent international economic problems

Formulas for this chapter

Crisis vulnerability ratios

Reserve adequacy = reserves / short-term external debt (benchmark >= 1) Debt service ratio = debt service payments / export earnings (watch above 20 %) Import cover = reserves / monthly imports (benchmark >= 3 months) External debt / GDP = (debt in foreign currency x exchange rate) / GDP

Screening any emerging market for the crisis anatomy, and any news article that calls a country vulnerable. These benchmarks are standard practice rather than deck content, so check them against your class slides.

short-term external debt
Obligations falling due within a year, which must be refinanced. Long-term debt does not belong in this ratio
export earnings
The denominator of the service ratio, because debt service must be paid in foreign currency

The balance sheet effect

debt in domestic currency = foreign currency debt x exchange rate new debt/GDP ratio = old ratio x (new rate / old rate) rise in points = old ratio x (factor - 1) Example: 40bn at 25 -> 100 per dollar takes debt from 12.5 % to 50 % of GDP

Whenever a question involves a devaluation in a country with foreign currency debt. It explains why a depreciation can be contractionary even when Marshall-Lerner holds.

factor
New rate divided by old rate. The debt ratio scales by it one for one
falling GDP
The crisis also cuts real output, so the denominator falls and the ratio rises further

Rate rise against loss of value

% rise in the rate = (new rate - old rate) / old rate % loss of value = 1 - (old rate / new rate) They are DIFFERENT numbers: 30 to 45 is a 50 % rise and a 33.3 % loss

Any question or headline about a currency falling. State which convention you are using, because both are correct about the same event.

rise in the rate
What an importer experiences: foreign goods cost this much more
loss of value
What a headline usually quotes: the currency fell this much

The five questions for a news article

1 Which account? current, capital, or reserves 2 Which direction? does R rise or fall, and what does that do to the number 3 Which mechanism? price, income, monetary, or policy 4 Which zone? internal and external together: Swan zone I, II, III or IV 5 Which instrument, and what does it break?

Sessions 19-20 are delivered as a report or news article, and the assignment carries 15 per cent. Use this as the skeleton of any applied commentary. Check against your class slides.

step 4
Zones I and III need one instrument; II and IV need two, by Tinbergen's principle
step 5
Every instrument has a second effect. Naming it is what separates an answer from a summary
Step 1 of 25
The ideaTheory

The bill that is still unpaid

Nine chapters built machinery: how the balance of payments works, how exchange rates are set, how income and prices and policy adjust. This chapter is the list of things the machinery has not fixed.

Five problems, all live, none of them technical failures. Each is a case where somebody would have to accept a cost and nobody will.

Sessions 19 and 20 have no slide deck: they are delivered as a lecture plus a report or news article, so this chapter is also the method for turning a headline into an exam answer. Check against your class slides.

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