Japan’s central bank (BOJ) has ended what could be considered one of the most aggressive expansionary monetary policy programmes. The BOJ raised its short-term policy rate from -0.1% to between 0-0.1% on deposits held with the bank. This brings to an end negative rates, charging banks for money held at the BOJ, which have been in operation since 2016 – see image from Trading Economics.
The BOJ see the wage increases of 5.28% hopefully inducing more consumer spending and ultimately higher prices ending a long period of deflationary pressure. See mind map on Monetary Policy.
However even though interest rates are into positive territory monetary policy still remains very loose (expansionary) and borrowing and mortgage costs are not likely to rise by a large amount. The very loose monetary policy has been a key factor the decline of the Yen v US dollar which had helped exporters but made imports more expensive therefore putting pressure on households. This is a very good example of macro policy that could be included in A Level essays. Below is a news item from ABC Australia explaining the rise.
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Argentina’s new president, Javier Milei, in his campaign spoke fervently of abolishing the central bank and replacing the peso with the US dollar. Although Milei, a far right libertarian, has some quite extreme ideas there are arguments in support of adopting the US dollar. See video below from Deutsche Welle.
The big concern for the Argentinian government is that dollarisation means the country gives up the ability to influence its own economy through monetary policy by adjusting the money supply. Basically Argentina outsources monetary policy to the US Fed Reserve and interest rates are set at a rate that is applicable to the US economy and not other dollarised countries. Furthermore, the central bank of Argentina would be unable to be the lender of last resort and inject money into the economy.
The October inflation figure in Argentina was 143% with interest rates at 133% – the latter being one of the highest levels in the world. Underlying this inflation problem is how the central bank is trying to reduce the amount of pesos that are in the economy. They issue LELIQS (letras de liquidez) which are short-term bonds that they sell to commercial banks in exchange for pesos therefore taking pesos out of the economy in the hope it reduces the inflation rate. However the problem is that the central bank have to print pesos to pay for the interest of 118% on these bonds, and the national debt of the central bank more than doubles each year. Therefore it is a vicious cycle of issuing short-term bond (LELIQS) to reduce money in the banking system but then having to print money to pay for the interest on the bonds which injects more money into the banking system. The more pesos the central bank prints, the high the inflation and the increasing number of pesos people need to buy food etc therefore deposits in the bank have dropped drastically even with record high interest rates. This also means demand goes up for US dollars on the black market and more scarcity in official markets. The more pesos you hold means the more you lose in dollar terms and therefore increases the incentive to buy dollars with pesos.
Does Argentina have enough US dollars?
One of the main criticisms is Argentina doesn’t have the dollars to do it. At the end of 2022, Argentines held over $246 billion in foreign bank accounts, safe deposit boxes, and mostly undeclared cash, according to Argentina’s National Institute of Statistics and Census. This amounts to over 50 percent of Argentina’s GDP in current dollars for 2021 ($487 billion). Hence, the dollar scarcity pertains only to the Argentine state.
Ecuador and El Salvador dollarisation
In 1999 Ecuador made the decision to dollarise its economy which basically curbed hyperinflation and helped prevent the sudden slide of the currency (sucre). With dollarisation people bring their dollars into the economy from overseas as was the case in Ecuador. Figure 2 shows how deposits in pesos in Ecuador fell by 50% when measured in dollars from February 1998 to December 1999 and then bounced back exactly when the economy was dollarised, recovering the February 1998 level by June 2002.
As for El Salvador, after dollarising the interest rate fell from 20% to 6% for mortgages, increasing their maturity from 5 to 25 years. El Salvador’s inflation and interest rates have been among the lowest in Latin America for 22 years regardless of the government budget deficit and of international crises, including the 2008 global financial crash and the COVID-19 pandemic.
The experience of dollarisation in Latin American has populations not wishing to reinstate a national currency. The monetary experiences of daily life have taught them that dollarisation’s noticeable benefits far outweigh its theoretical drawbacks.
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An index that measures the value of $NZ in relationship to a group (or “basket”) of other currencies – see image right. The currencies included are from NZ’s major export markets i.e. Australia, USA, Japan, Euro area, UK. – $A, $US, ¥, €, £. Each of the currencies included in the TWI is “weighted” according to how important exports to that country are (= % of total exports). From the TWI we can see if the $NZ has appreciated or depreciated against our major trading partners currencies overall.
Weakening NZ dollar and implications for current account Westpac Bank in their Economic Bulletin last week mentioned that since 2021 the NZD has fallen by over 5% on a trade weighted basis and by around 14% and 3% versus the key USD and AUD currencies.
So, what might that downside risk mean for the NZD? We can get a clue by considering that historical relationship between changes in the terms of trade and the exchange rate in down-cycles. So far, the cycle we are experiencing has been fairly moderate – similar to the falls seen in 2011/12 but less than experienced in the Global Financial Crisis period and in 2013/15 (when dairy prices, in particular, fell significantly). If we were to see export prices and the terms of trade fall further in line with those episodes – i.e., by another 4% or so – then the implication would be further weakening of the NZD. In such a scenario, we could see another 10% fall in the TWI and NZD/USD. We can see this in past downturns in the terms of trade where episodes involving larger NZD adjustments are associated with greater current account adjustment. This is because the underlying shock driving both the terms of trade and the exchange rate prompts weakness in domestic consumption and ultimately reduced imports and an improved trade balance – see below.
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The BRICS (Brazil Russia India China and South Africa) countries have long been concerned about the dominance of the West in global financial institutions and trade. In order to try and increase its influence the BRICS countries agreed to add new members to the Alliance – Saudi Arabia UAE Iran, Egypt, Ethiopia and Argentina. BRICS countries represent 42% of the global population and over 25% of global GDP – see table. BRICS have overtaken the G7 leading industrialised nations in their share of World GDP (PPP based) 32% compared to the G7 of 30% – see graph.
However BRICS’ voting power in the IMF and the World Bank does not equate to its share of global GDP. Recently they have been increasing trade in their own currencies to reduce their reliance on the US$ and there has been talk of creating their own common currency. However, although India South Africa and Brazil are all keen on a positive relationship with the West the same could not be said about Russia and China. Add to this the cross border issues between China and India. Below is a video from Al Jazeera – ‘Counting the Cost’- where they discuss the impact on the West and the threat to the US$ dominance.
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Falling rouble has the Russian central bank raising interest rates by 3.5% to 12%. Last week the rouble plummeted – over 100 roubles was required to buy a 1US$. This compares to around 50 roubles in June 2022 – see graph from the FT. Also with the current account surplus diminishing the demand for roubles declined which reduced its value. The decision is to raise interest rates is to limit risks to price stability – Russia has a target rate of 4% but some inflation indicators rose over 7%. The war in the Ukraine is also driving inflationary expectations.
Impact of a falling currency
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Contractionary monetary policy by the US Federal Reserve to keep inflation in-check has impacted African currencies. With higher interest rates in the US and a volatile global environment investors tend to run to the safety of the US dollar and higher paying US treasury bonds. This has led to a depreciation in African currencies and inflation as import prices increase. For most African countries more that 60% of imports are priced in US dollars and a 1% depreciation against the US dollar = an average of 0.22% increase in inflation.
The graph below from the IMF shows the extent of the depreciation. Two countries’ currencies depreciated by more than 45% – Ghana and Sierra Leone. Some central banks have used their supply of foreign reserves in an attempt to prop up their currencies – giving foreign exchange to importers.
Weaker currencies push up debt – approximately 24% of public debt in most African countries in denominated in US dollars so with a weaker currency they have to find more of their currency to pay back the US dollars. Furthermore, the weaker currency has meant that public debt has risen on average by 10% of GDP in the region. Below is a mindmap showing the impacts of a falling currency.
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With the global economy experiencing supply chain pressures, inflationary problems, higher interest and geopolitical tensions are we seeing what the IMF call ‘slowbalisation’?
Part of this change has come about from the decoupling of the American, European and Japanese economies from China. This ultimately alters trade and investment flows around the global economy and will mean lower economic growth and less liquidity. For instance consider the restrictions on technology including complex microchips being placed by the US on China. Janet Yellen the US Treasury secretary referred to ‘friendshoring’ which means relocating production to countries that fall within the US economic sphere of influence. Apple’s announcement that it would begin sourcing sophisticated chips from North America is the signal that many global firms have been waiting for to begin reducing their exposure to China.
Furthermore as well as the impact of decoupling of trade with China, a shortage of labour will also add to production costs and will result in slower rates of growth. Labour force participation rates have dropped as less migrant workers coming into countries. This scarcity of labour will put further pressure on wages and ultimately inflation. To counteract the latter interest rates will continue to climb and this will lead to further problems:
The cost of financing economic expansion will become more expensive. Firms that have lived off 0% interest rates and negative real rates (nominal interest rate – inflation) will face increasing problems on their balance sheets
In the medium term interest rates are determined by inflationary expectations and rates tend to move lower in periods of disinflation and higher in periods of inflation. The risk for all central banks and policymakers is if the rate of inflation goes above that of expectations there can be a further tightening cycle. Although recently we have seen a reduction in inflation, central banks need to maintain a level of tightness – high interest rates – so that inflation levels are within a country’s target range.
Phases in the graph
Industrialisation was prevalent in Europe and the USA and the advances in transposition reduced the costs for firms and encouraged trade.
WW1 and WW2 saw a very protectionist environment with trade becoming regionalised with trade barriers and the breakdown of the gold standard into currency blocs.
The post-war recovery and trade liberalisation encouraged growth in Europe, Japan and developing countries. The war had also stimulated a hugely expansionary fiscal and monetary policy which rendered the gold standard unsustainable. Floating exchange rates took over from those that were pegged to the US dollar.
In 2001 China became a member of the World Trade Organization (WTO) and there was the emergence of more free market economies with relaxed capital controls between countries. This was helped by the fall of the Berlin Wall and the integration of the former Soviet bloc.
“Slowbalisation” followed the global financial crisis in 2008 and the rising geopolitical tensions with protectionist policies being imposed by many countries.
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Recently there has been talk of preparation for a currency union between the Brazilian ‘real’ and Argentina ‘peso’ which would create the world’s second largest currency bloc. The new currency, which Brazil suggests calling the ‘sur’ (South) would reduce the reliance on the US dollar and encourage greater regional trade.
To enter a currency union it represents one end of the exchange rate continuum whilst the other end is pure floating currency determined by market forces (supply and demand) – see Fig 1 below:
By joining a currency union both Brazil and Argentina no longer have control over managing inflation, attaining full employment and use interest rates to respond to different stages of the business cycle. One of the benefits of a floating rate is that it acts as a shock-absorber – a downturn in the economy leads to a depreciating exchange rate and therefore more competitive exports and more expensive imports – however a lot depends on the elasticity of demand for both exports and imports. Remember the Greek experience in the EU when their economy was in a dreadful state financially and they had the Euro as their currency. If Greece still had its old currency the drachma it would have depreciated and maybe have led to some sort of export recovery. The concern was that the strength of the Euro was determined by the Germany economy and this impacted the poorer members of the currency union like Greece, Portugal and Spain. When asymmetric shocks occur they effect economies differently as they can be due to different production and consumption structures, trade exposure and varying levels of inflation between the two countries. This is apparent with Argentinian inflation hitting 95% in 2022 compared to 5.79% in Brazil. Furthermore, central bank interest rates in Brazil are 13.75% compared to the central bank in Argentina of 75%. It seems here that the Argentinian economy is in real trouble and add to this they are on the brink of another default on their debt – 5th in 40 years. So who is to benefit here – it seems that Argentina is in the worst predicament and might welcome currency union to try and improve the economic conditions in their economy. However will a full currency union actually happen? Table 1 below summarises some of the pros and cons.
From CNBC – some good graphics in this presentation and an interview with Eswar Prasad, an economist at the Brookings Institution and professor at Cornell University. Quote below:
“So here’s the paradox. The rest of the world despises how dominant the dollar is, yet they go to the U.S. dollar, because there really isn’t much of an alternative,”
Some facts about the US Dollar –
60% of the world’s central banks’ foreign exchange reserves in US dollar-denominated assets.
40% of consumers use the US dollar as a payment currency worldwide.
60% of international debt and 50% of loans globally is in US dollars.
US dollar – still the main currency to buy and sell commodities such as oil.
“This is ultimately going to entrench the dollar’s dominance even further,” Prasad said. “That is certainly a serious problem for low-income countries that have high levels of foreign debt, especially dollar-denominated debt.”
The US dollar hasn’t been stronger since 2000 – it has appreciated:
22% – Yen,
13% – Euro,
6% – emerging market economies.
The dominance of the US$ has serious implications for the macroeconomy of almost all countries. Although US share of world trade has declined from 12% to 8% the US$ share of world exports has remained around 40%. Therefore imports denominated in US$ into countries have become more expensive and it is estimated that for every 10% US$ appreciation adds 1% to the country’s inflation figure. For developing countries with a high dependency on US$ denominated imports this is particularly worrisome. Furthermore almost 50% of cross-border loans and international debt securities are in US$ and although emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As the US Fed continue to raise interest rates with a fourth consecutive 75 basis points rise on 2nd November financial conditions have tightened and the strong US$ only compounds these pressures especially for many low income countries that are close to defaulting on their debt.
What should countries do? Some countries and intervening in the foreign exchange buying their own currency with US$ reserves – foreign reserves fell by over 6% in the first half of this year to support their currency. Intervention should not be a permanent policy as it could mean a loss of foreign reserves as well as alerting markets to your intentions which could play into the hand of foreign exchange dealers. Monetary policy needs to keep inflation close to its target rate and the higher price of imports should reduce demand and therefore prices but a lot depends on the elasticity of demand for a country’s imports – if inelastic there is increasing pressure on inflation. Fiscal policy should provide some support to those that are most vulnerable without jeopardising the inflation target.
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With the impact of technology and the geopolitical changes happening in the global economy is the US dollar coming under pressure as the world’s reserve currency? The data indicates that the US dollar still reigns with approximately 60% of the world’s central banks’ foreign exchange reserves invested in US dollar-denominated assets. Most commodity contracts, like oil, are priced and settled in dollars. It is used as the medium of exchange for the majority of global transactions – see chart below:
The US economy now accounts for about 25% of global GDP (at market exchange rates), down from 30% in 2000 and changes are happening in foreign exchange markets. One area that has impacted this is that transactions between emerging market currencies are becoming easier. China and India, for example, will soon no longer need to exchange their respective currencies for dollars to conduct trade cheaply.
What about the Chinese renminbi? Although there has been some progress with the renminbi as it now accounts for approximately 3% of international payment transactions, and 3% of global foreign exchange reserves are held in renminbi. However it is unlikely to challenge the dominance of the dollar unless there are market driven reforms and upgrades to its institutional framework.
US dollar debt Foreign investors, including central banks, hold nearly $8 trillion in US government debt. Overall US financial obligations to the rest of the world total $53 trillion. Because these liabilities are denominated in dollars, a plunge in the value of the dollar would make no difference to the amount the United States owes but would reduce the value of those assets in terms of the currencies of the countries that own them. China’s holdings of US government bonds, for instance, would be worth less in renminbi.
Source: Enduring Preeminence by Eswar Prasad. IMF Finance & Development. June 2000
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There has been a lot of talk about global currency’s depreciating against the US dollar but why has the dollar been so strong? In times of uncertainty people gravitate to the US dollar for safety – it is the global reserve currency and the vast majority of global trade is done in US dollars. The uncertainty in the global economy has been due to:
The pandemic
Expansionary fiscal and monetary policy
Supply side problems not being able to keep up with demand
Ukraine War which has increased energy and food prices.
From the above there has been strong inflationary pressure in the US especially and this needs contractionary monetary policy intervention – higher interest rates. The US Fed Reserve has increased interest rates ahead of other developed economies.
28th September 2022 – US dollar.
Problems with a strong US dollar When the US dollar appreciated – see image above – it has a contractionary impact on the global economy. The dollar and US capital markets are far more globally important than the US economy itself – the currency is the world’s safe haven and its capital markets are those of the world. Therefore the exchange rate is crucial when money goes into and out of the US. Also countries worry about the exchange rate in particular when inflation is high – weak currency makes imports more expensive and can feed inflation. For those that owe money in US dollars a weak currency becomes very expensive as they have to convert more of their currency into US dollars – this is prevalent in the developing world. With Fed Chair Jerome Powell determined to bring US inflation down there is the risk of further interest rate hikes which could put economies into recession.
Source: Financial Times – Why does the strength of the US dollar matter? Martin Wolf
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Below is a very good video from Al Jazeera that explains the Bank of England’s emergency intervention to calm the market after the UK’s government’s tax cut plans. Once these plans were announced the GB Pound slumped to it lowest level $1.035 against the US Dollar since 1985. The BoE announced it is buying up long-dated UK government bonds to bring stability to financial markets but even higher interest rates are still likely and that is worrying news for the country’s property market. Good coverage of this below from Al Jazeera.
With the falling value of the UK Pound here is a mindmap on the impact of a weaker currency. What seems to have caused this is the UK government’s decision to make tax cuts, which are to be paid for by higher government borrowing. On hearing this news investors appear to have dumped UK pounds fearing further instability in the UK economy.
The weak pound is a chance to stimulate exports although it has meant more expensive imports of oil and food – UK imports 50% of its food. This will put further pressure on inflation which in turn may also force the Bank of England to increase interest rates.
Source: CIE A Level Revision – Susan Grant
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This year the US dollar has appreciated by 10% against other major currencies. The main reason behind this is the US Fed increasing interest rates in tackling the inflationary pressure in its economy – since the beginning of the year the Fed Funds rate has increased from 0% to 2.25-2.5%. This increase in interest rates has been quicker than other major economies which has led to the strengthening of the US dollar. This stronger dollar makes US exports less competitive and imports cheaper as the US dollar buys more of the other currency. However even if a country doesn’t trade with the US it can still be impacted by the US dollar when pricing goods and services. The problem lies in the invoicing of fuel and food which is usually quoted in US dollars – an IMF paper suggested that approximately 40% of invoices are in US dollars – see Figure 4 below. Furthermore they also found prices for businesses doing trade between two distant countries can be much more sensitive to the value of the US dollar than the relative levels of the tow local currencies.
With the US Fed focused on inflation further interest rate increases on the cards which could lead to further strengthening of the US dollar. To counter this action other countries central banks could increase their interest rates ahead of time to protect their currency.
IMF – July 2020
The graph above reveals that the share of global exports invoiced in dollars is much larger than the share of exports destined to the US. This difference indicates that the dollar plays an outsized role in the invoicing of global exports; the patterns for imports are quite similar. The right panel of Figure 4 establishes that the dollar’s leading role reflects more than its use for the invoicing of commodity exports: once exports of commodities are removed from both the invoicing and export shares, the dollar share of invoicing (23%) still exceeds – by a sizeable margin – the share of exports destined for the US (10%). Figure 4 also reveals that the euro’s share in global export invoicing is an impressive 46%. While this appears as a very large number, recall that a currency’s vehicle currency role can be gauged only by comparing its share in global invoicing to the share of global exports that involve the jurisdiction issuing the currency. This comparison reveals that the euro’s share in global export invoicing is not much larger than its share, 37%, of exports destined to EA countries.
Sources:
Strong dollar is a major headache for other countries. FT 30th July 2022
IMF – Patterns in Invoicing Currency in Global Trade. Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo, Arnaud Mehl, Tra Nguyen. July 2020
In the majority of economics textbooks a depreciation of the exchange is beneficial to an economy especially those like developing countries which depend a lot on export revenue.
A fall in the value of the exchange rate will make exports cheaper and so acts as an implicit subsidy to firms that sell abroad. Exposure to world markets also helps companies in the developing world learn and improve. Finished imported products that are still purchased will be more expensive and some of these will count in the country’s consumer price index. Costs of production will be pushed up because the cost of imported raw materials will rise. Domestic firms may also feel less competitive pressure to keep costs and prices low.
A rise in the value of exchange rate will make exports more expensive in terms of foreign currencies, and imports cheaper in terms of the domestic currency. Such a change is likely to result in a fall in demand for domestic products. A higher exchange rate may also reduce inflationary pressure by shifting the aggregate supply curve to the right because of lower costs of imported raw materials. The price of imported finished products would also fall and there would be increased competitive pressure on domestic firms to restrict price rises in order to try to maintain their sales at home and abroad.
It has been traditional for developing countries to try and engineer a weaker currency to make their exports more competitive especially as this revenue is one way in which their economies can start to grow. China and other South East Asian economies adopted this strategy as they went through industrialising their economy. Empirical studies suggest that an undervalued currency boosts growth more in developing rather than developed economies.
Why then is it that some African countries still want to maintain a strong currency? Primary sector exports and overseas aid raises the demand for local currencies making them appreciate. Governments are concerned about a weaker currency as
Some are dependent on capital imports to finance infrastructure projects
It forces them to spend more income to pay back foreign debts.
Pushes up the cost of imported goods, including food, medicine and fuel – mainly impacts the city population who are more likely to complain to politicians.
Some companies in developing countries import a lot of their machinery and raw materials – additional cost to their production.
A weaker currency does make exports cheaper but this can be nullified by more expensive imports.
However all of this has been overshadowed by COVID-19. The pandemic is increasingly a concern for developing countries which rely heavily on imports to meet their needs of medical supplies essential to combat the virus.
Most economists are in agreement that when there is an increase in inflation the central bank increases the base interest rates in order to reduce spending and encouraging saving. This takes money out of the circular flow and should lead to less borrowing and therefore less pressure on prices.
The Turkish lira dropped by 17% this year with three cuts in interest rates since September. This comes as inflation has climbed to 73.5%. So why would you drop interest rates when you have rapidly increasing inflation? President Erdogan sacked the governor of the head of central bank Naci Agbal who had been hiking interest rates to dampen down inflation – he was the third governor to lose his job in the last two years. Erdogan believes that raising interest rates would raise inflation rather than reduce it and he proceeded to cut rates further which saw an even steeper decline in the lira. An argument for this policy could be that the cheaper exports can drive economic growth.
Source: FT – 4th June 2022
The collapse of the lira make exports competitive and imports more expensive and in September Turkey posted a current account surplus thanks in large to a recovery in tourist numbers. Turkey relies heavily on imports of raw materials and energy and with the exchange rate falling these have become a lot more expensive. Although Turkish exports should be cheaper, the heavy import component of finished exports makes those goods more expensive so this outweighs the benefits of having a cheaper lira – e.g. in assembling kitchen appliances the price of imports of the component parts make the overall price of the appliance more expensive. This just fuels more inflation. Supermarkets are limiting customers to one item as they know people will stockpile produce with the ever increasing inflation rate.
So with inflation now at 73.5% and and interest rates at 14% this makes real interest rates = – 59.5%. The central bank kept its benchmark interest rate at 14% at its May meeting, extending a pause that followed 5% of cuts last year. This has led to the local population to turn to other currencies – US$ Euro – in order to protect the value of their money. Below is a very good video clip from Deutsche Welle (German World Service) outlining the crisis that Turkey face and how a policy of cutting interest rates has backfired.
The recent tightening of monetary policy by US Fed Chair Jerome Powell to combat inflation has seen higher borrowing costs and financial-market volatility. The US$ has risen 7% against a series of major currencies since January this year – a two year high. It has always been a safe haven currency and with a rising Fed Rate and market rates even more capital could flow into the US increasing the demand for US dollars and therefore appreciating its value. See mindmap below for the theory behind a stronger currency.
Adapted from: CIE A Level Economics Revision by Susan Grant
A high value of a currency makes exports more expensive but does lead to cheaper imports especially of the inelastic nature. But to foreign economies it does drive up import prices further fueling inflation. For developing countries this is a concern as they are being forced to either allow their currencies to weaken or raise interest rates to try and stem the fall in value. Also developing economies are concerned with the risk of a ‘currency mismatch’ which happens when governments have borrowed in US dollars and lent it out in their local currency. However it is not just developing countries that have had currency issues. This last week saw the euro hit a new five-year low with the US Fed’s aggressive tightening of monetary policy. The real problem for some economies is that they are further down the business cycle than the US so in a weaker position.
“While domestic ‘overheating’ is mostly a US phenomenon, weaker exchange rates add to imported price pressures, keeping inflation significantly above central banks’ 2% targets. Monetary tightening might alleviate this problem, but at the cost of further domestic economic pain.” Dario Perkins – chief European economist at TS Lombard in London
Source: Bloomberg – Dollar’s Strength Pushes World Economy Deeper Into Slowdown. 15th May 2022
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A weaker currency will make exports cheaper and imports more expensive – see mindmap below. As for Japan’s falling yen it is positive for its economy as a whole as it tries to get closer to its 2% inflation target.
The weak yen is also a chance to stimulate exports, even if Japan is no longer the currency-sensitive export machine it once was. Although it has meant more expensive oil and food imports, wages have hardly risen in response to higher prices. It used to be the case that the world was concerned with cheap Japanese exports but this means that it is exporting deflation which is what most developed countries want. The FT article on this topic is very good
Source: CIE A Level Revision – Susan Grant
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This is a useful piece of economic theory which I will be discussing with my classes. After the Russian invasion of Ukraine the Russian currency the Rouble collapsed:
Before the invasions 1 euro = 85 Roubles
After invasion 1 euro = 110 Roubles
After central bank intervention 1 euro = 94 Roubles
This means that it cost post invasion 110 roubles to buy 1 euro, compared to 85 Roubles pre-invasion. The Russian central bank did intervene in the foreign exchange market by using its foreign exchange reserves to buy roubles – demand for roubles goes up. The plan is to sell US$ and euro denomination investments to buy roubles. However a ban on the central bank using swift payments to access reserves overseas has meant that intervention was not an option.
At such low levels the Russian exports are going to bring in less money to ultimately subsidise the war effort. A stronger Rouble will bring in more cash and enhance the image on the country – the value of a country’s currency is a good indicator of how the world views that country.
How will it work?
Putin’s order makes Gazprombank the intermediary in the gas trade. A foreign buyer of gas is required to transfer foreign currency to a special account (so-called K) at Gazprombank. They would then buy roubles on behalf go the gas buyer to transfer roubles to the another special (K) account at Gazprombank – see flow chart.
Why does it matter?
Europe is heavily reliant on Russia for its energy needs, with around 40% of its gas coming from the country. If Moscow decides to turn off the taps it could trigger supply shortages, factory closures and crippling energy costs across the region.
Call in the church to stop the slide in the Rouble
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ECONFIX 