Foreign Capital Inflow

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

As Australand has a flexible exchange rate, the first and most logical method is to reduce interest rates. This will cause an outflow of capital, and the sale of Australand dollars, as investors seek a higher interest rate elsewhere. This relation is illustrated in figure three below and shows that a decrease in interest rates causes a decrease in the exchange rate:

The Federal Government uses the monetary policy and fiscal policy to establish and determine the best way to manage the economy. Monetary policy is used by the Federal Reserve to manage the money supply. This includes credit, cash, check, and money market mutual funds, with loans, bonds, and mortgages being the most important. This policy can be broken into two categories: monetary restraint and monetary expansion. As it states, one is trying to restrain the market while the other expresses expanding the market. With control over the money supply, the two categories for monetary policy can manage the inflation of the economy. After this has been complete, the unemployment rate is a second objective that is handled and reduced. Fiscal policy is used as reference to the tax and spending policies, and is handled completely by the Federal Government rather than the independent agency of the Federal Reserve. In comparison to the monetary policy, there is also two sub categories of expansion and restriction. This paper will explain why I believe the monetary restraint policy is the best option for maintaining a stable economy through the use of controlled spending by limiting the access consumers have to money, its reliability in being the solution to a growing problem, and the benefits we see from past occasions. Using the monetary restraint policy will require the Federal Reserve to increase the interest rate nation-wide requiring citizens to decrease spending and borrowing.

This can be done through purchases of government bonds. When the bank purchases such securities, money originally held by the bank must be used in these purchases and thus increase money supply. With more possible funds for financial institutions to loan, interest rates would decrease, with similar effects as lowering the prime rate. The corresponding stimulation of aggregate demand will once again increase output.

High inflations such as galloping inflation leads to currency value depreciating leading to low economy growth rate and a turnover in the foreign investors.

In general, an independent, transparent and credible central bank, “strong fiscal position”, sound financial system with rigorous regulation and supervision and flexible exchange rate is vital. Furthermore, a more effective strategy is supposed to “phase in” following successful disinflation (Mishkin, 2000, p.106-p.107).

A country’s dominance in world trade, its status as the leading creditor and exporter of capital, initially underwrites its emergence as international money. The use of the currency of a country as the international reserve was both a logical outcome and a necessary basis of the development of capitalist internationally and the tremendous concentration of capital and trade flows in the hegemonic country. However, the perpetuation and preservation of its dominant role does not depends on its continued ‘creditor’ status but rather on its ability to attract and recycle capital from the rest of the world, while incurring a growing debt burden. It has to be the ‘borrower of last resort’. The imperative of maintaining international liquidity and maintaining sufficient global reserves depends on the ability of the country issuing the international money to sustain a deficit without eroding its status as a reserve currency.

Adopting capital controls have allowed developing countries with the ability to pursue a more independent monetary policy. This has led to positive GDP growth due to the promotion of stability in prices and reaching the level of sustainable output and employment growth. The implementation of capital controls prevents a large volume of capital inflow, avoiding the appreciation of the

There are many factors involved and questions that can arise when it comes studying central banking and Foreign Exchange Markets. This paper will attempt to explain why the simultaneous targeting of the money supply and interest rate is at times impossible to achieve, ways in which Central Banks can intervene in Foreign Exchange Markets, and what the Britton Woods Agreement did to the ability of foreign exchange rates to fluctuate freely.

First of all, the foreign direct investment is an international movement of capital made by a company or by other entity to establish a subsidiary or to affiliate abroad, by acquiring an interest in a foreign company, by merging with a company foreign, or by establishing a joint venture in another country (O 'Neill, 2004). The FDI will allow Wal-Mart to expand their operations into the Moroccan market, to increase its productivity, and to increase its turnover. By merging with Marjane Corporation in Morocco, Wal-Mart will benefit from the proximity of consumers, from the key markets, from certain benefits comparative like a cheaper labor or a more skilled work, transport and communication, other infrastructure, and from a competitive tax and regulatory framework. Moreover, Wal-Mart Corporation can also invest in Morocco to better manage their global supply networks of the production and distribution to ensure its access to essential resources. Furthermore, the FDI can also be an important catalyst for economic development and prosperity of Morocco. Finally, the FDI has the dual benefit of creating jobs and new sources of tax revenue in both developed economies and in developing economies. In addition, there will be effects such as increased demand for local services and the transmission of knowledge of expatriate managers to local workers. Nevertheless, for businesses that invest and operate in a foreign environment can be confronted to significant challenges, especially if

Likely another study was conducted on the impact of foreign capital inflow on savings and investment: a case of Pakistan by (Aslam, 1987). The study shows that the net foreign capital inflow has a negative effect on domestic saving and is significant at conventional level.

For reducing inflation and unemployment rate , government to take some measures is necessary and important，in many countries, the exclusive control of the central bank to issue currency, which according to the operation of the economy, the number of markets rationally regulate currency in circulation and guarantees a stable currency, the

International Capital mobility- the free flow of investment financing from one country to another is a hot topic in the world of economics. A common question that rises when discussing this matter is, does capital mobility benefit developing countries? As with most other subjects the answers tend to vary.

Whether a country will face a trade-off between the accumulation of wealth and consolidation of power depends on the type of international economic exchange the country is involved in as well as the nature of the state. In this essay, I consider trade, currency exchange and foreign investment as the primary economic exchanges that countries are involved in, as well as the different natures of states such as developing economies and industrialized nations. I argue that countries involved in international economic exchange will have to compromise between the accumulation of wealth and the consolidation of power in the short-term to maximize both in the long term. I also put forward that the primary objectives of states would be to advance both wealth and power at the same time, with harmonious objectives. However, because national interests drive international policies, one will eventually be prioritized over the other. By looking at trade, currency exchange, and foreign investment I assume that global powers will always favor agreements that benefit their national interests, or maintain their current position as economic and political powers in the international arena.

Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).