Question

Essay Question: Which of the proposals for international reform do you think is most important, and why?

-Argue for your chosen proposal in light of the strengths and weaknesses of alternative proposals.

-Argue for your choice in terms of what you think is the most relevant cause of international Balance of Payments crises.

-Address the economic significance of your choice as well as its political feasibility.

Examples: International Lender of Last Resort, Supranational currency (Bancor), Tobin Tax, capital controls, Banking regulation and supervision (domestic level, international level)

A short summary on any of the examples will get a thumbs up :) ty!

Answer 1

Important proposals for international reforms :-

Following are some important steps that can be adopted by the country to bring international reforms .

1) To reconcile country's balance of payment imbalance a national autonomy must be established for global macroeconomic policies.

2) A return to gold standard would reduce exchange rate risks

3) Establishing a world central bank for effective governance of international trade and balance of payment problems.

4) The economic efficiency can be increased by controlling speculative capital flow through Tobin Tax .

5) The target zone proposal where major countries would negotiate targets for real effective exchange rates and commit to maintain the value within the range .

Strength and weaknesses of proposals :-

1) It can be difficult to manage the real exchange rate and some argue that such system would interfere with efficient resource allocation .

2) An extreme form like World Central Bank would require a country to sacrifice their sovereignty .

3) The system emphasis of return to gold standard will lead to BOP equilibrium along with full employment.

4) All countries might not agree to reconcile their economic policies.

Reasons for Balance of payment crisis :-

1) There are substantial exchange rate variations.

2) Another reason is Exchange rate overshooting .

3) The nominal rate fluctuations have not matched PPP variations , so real exchange rates have fluctuated .

4) The countries have to face foreign shocks due to intervention.

5) Central banks like China have enormous dollar reserves ,selling of which can cause dollar depreciation dramatically.

Economic effectiveness and political feasibility of the choices :-

The most feasible choice to cope up with this is introducing Tobin Tax .

1) Tobin Tax is an international uniform tax on all spot conversation of one currency into another ,proportional to the size of transaction.

2) It's suggested tax rate is 0.1%

3) It's main objective is penalising short term speculators but not long term investors to stabilize markets .

4) The Tobin tax could be implemented relatively easily and cheaply using existing market infrastructure and networks however it would require all the countries to agree this system of transaction.

5) A Tobin Tax would raise significant revenue and likely to increase significant share of cost that will be passed on eventually , however it will benefit in terms of revenue collected and additional stability gained.