Case 1: The Euro in Crisis
a) Evaluate the European Central Bank’s (ECB) response to the financial crisis of 2008-2010. What was their analysis of the problem?
b) The ECB responded less aggressively than the US Federal Reserve to the crisis. Why?
c) In May 2010, should the ECB agree to purchase Greek sovereign debt? Case 2: Foreign Ownership of US Treasury Securities
a) Why is foreign ownership of US Treasury securities rising? It is more interesting for foreigners to buy US debt to hedge their holdings.
- Accumulating budget deficit (mandatory public spending, military spending) huge military spending due to wars in Iraq and Afghanistan. 9/11 and war on terrorism. Foreign investors are willing to accept lower yield than domestic investors.
- negative trade balance (domestic demand; oil imports;)
- china buying dollar securities to strengthen it’s own currency and promote trade - expansive fiscal policy (recession)
- foreign investments:
a tool to counter-depreciation of the $ value ?
- most liquid market; lower transaction costs; safe heaven; no big influence on price - sovereign wealth funds
- Number 1 trade currency
- geopolitical interests;
- huge imports from the U.S. => foreign countries holding huge dollar reserves - safety and stability of Dollar denominated debt. – less risky investment What are the underlying contributing factors?
b) Suppose that after the financial crises in emerging markets, central banks in emerging economies become very cautious and wanted to increase their foreign currency reserves by accumulating more US Treasury securities. Holding everything else unchanged (including the US federal budget deficit), predict the impact of this shift in foreign central banking practice on the US real interest rate and the real value of the US dollar. c) Suppose that there is no such shift in foreign central banking policies as described in question b above. Instead, suppose that...