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Monetary Policy And Capital Flow

The long run affect of a continued monetary restriction by the central bank may increase foreign reserves to the point where speculative inflows are generated and the money supply becomes unstable. .
             The problem of capital flows would not be so significant if the domestic economy, Australia, was more in phase with the foreign economies, Europe. One factor besides high domestic interest rates that added incentive for foreigners to send their funds to Australia was a difference between the policy being followed domestically and the policies in other countries. For example, in 1970-71 the United States was following a relatively expansionary policy when Australian policy-makers were attempting to restrict the money supply. This statement coupled with the fact that interest rates were falling in Europe made it more appealing for capital to be sent to Australia. Porter argues that this could have been anticipated; "With a fixed exchange rate and full convertibility of the Australian dollar, it is to be expected that an attempt to pursue an independent monetary policy will generate substantial capital flow, the direction of flow depending upon monetary conditions in Australi!.
             a relative to those abroad and the magnitude depending both on the extent of the divergence and degree of integration of the Australian capital market with capital markets abroad."".
             Porter offers a few main solutions to the problem of disruption to the balance of payments by monetary policy in his article. One solution is that of floating exchange rates. By allowing exchange rates to fluctuate and respond to market conditions, the currency would be allowed to increase until it reached equilibrium. Another solution, which the Australian government chose in 1972, is to construct barriers isolating the domestic money supply from foreign influences. The issue central to this is the correct assignment of policy instruments.


Essays Related to Monetary Policy And Capital Flow

1. Capital Market

Moreover, countries with liberalized capital flows are likely to have unexpected economic reversal that different from free good market. ... According the story of Mexico crisis, "the very weakness of the financially system can make the eventual crisis even worse by discouraging prompt adjustment of monetary policy in the lead-up the crisis "and can also complicate the policy response after the crisis has began."" ... The research shows capital flows on many cases do not have the positive supports on growth. ... He concluded that to discourage short-term speculative capital flows, resto...

  • Word Count: 1001
  • Approx Pages: 4
  • Grade Level: Undergraduate

2. The Price-Species Flow Mechanism

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3. Capitalist Economy System

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  • Word Count: 1364
  • Approx Pages: 5
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4. The role of IMF

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  • Word Count: 3629
  • Approx Pages: 15
  • Has Bibliography
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5. Foreign Exchange Rate

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6. Globalization

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  • Word Count: 1471
  • Approx Pages: 6
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7. Theory of Intergovernmentalism

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8. How China is using the WTO

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  • Approx Pages: 3
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