International Economics

Full Capital Account Convertibility (FCAC)

Capital Account convertibility in its entirety would mean that any individual, be it Indian or Foreigner will be allowed to bring in any amount of foreign currency into the country. Full capital account convertibility also known as Floating rupee means the removal of all controls on the cross-border movement of capital, out of India to anywhere else or vice versa.

Capital account convertibility or CAC refers to the freedom to convert local financial assets into foreign financial assets or vice versa at market-determined rates of interest. If CAC is introduced along with current account convertibility it would mean full convertibility.

Complete convertibility would mean no restrictions and no questions.… Read the rest

Abey Francis

The Efficient Markets Hypothesis (EMH)

Market Efficiency

The concept of market efficiency was first developed in the finance literature and its full form was first explained by Engene Fama. But now-a-days this concept is being used in other areas also.  Market efficiency implies that prices reflect all available information, but it does  not imply certain knowledge.   Many pieces of information that are available and reflected in prices are fairly uncertain.   Efficiency of markets does not eliminate that uncertainty and therefore does not imply perfect forecasting ability.  By definition then there should not exist any unexplained opportunities for profit.

“An ‘efficient’ market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants.

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Abey Francis

Pricing to Market Concept

One important aspect of Purchasing Power Parity (PPP) doctrine is its espousal of law of one price, i.e. assuming one-way transport costs and tariffs.   A HMT watch will be priced the same whether it is sold either in Mumbai or New York.   But in the literature of international finance two stylized facts are prominently mentioned.   First, real exchange rate movements are seen to be very persistent at the aggregate level of the economy.   Second, individual prices of traded commodities tend to be sticky in terms of local currency at the micro level.   Engel (1993) has compared the relative prices of different commodities within the same country versus relative price of the same commodity across different countries and he has reached the conclusion that the former measure is less variable in all but a few cases such as primary commodities and energy.  … Read the rest

Abey Francis

Detailed Information about Bretton Woods Exchange Rate System and The Special Drawing Rights (SDRs)

Bretton Woods Exchange Rate System (1944)

In 1944, as World War II drew toward a close, the Allied Powers met at Bretton Woods, New Hampshire, in order to create a new post-war international monetary system. The Bretton Woods Agreement, implemented in 1946, whereby each member government pledged to maintain a fixed, or pegged, exchange rate for its currency vis-à-vis the dollar or gold. These fixed exchange rates were supposed to reduce the riskiness of international transactions, thus promoting growth in world trade. The Bretton Woods Agreement established a US dollar-based international monetary system and provide for two new institutions, The IMF and the World Bank.… Read the rest

Abey Francis

The Bretton Woods System – Background, Design and Reasons for Collapse

Since the beginning of the 19th century, globalization, international trade and free trade between countries became the new economic order and several attempts have been made since then to develop policies and schemes to ensure the stability of the international monetary system. It is safe to say that in truth, the world economy has never been in a state of utopia, but nevertheless, we have never stopped trying to attain such.

The Bretton Woods era of 1944 to 1977, one of the few fairly successful schemes the world powers created in trying to achieve economic utopia, though existed for a short period, has been accredited as being one of the most successful international monetary systems, so impressive was the economic stability and growth of the era that there have been ongoing talks for a comeback of the system.… Read the rest

Abey Francis

Exchange Rate Regimes: The Bretton Woods System

Bretton Woods is the name of the town in the state of New Hampshire, USA, where the delegations from over forty five countries met in 1944 to deliberate on proposals for a post-war international monetary system. The two main contending proposals were “the White plan” named after Harry Dexter White of the US Treasury and the “Keynes plan” whose architect was Lord Keynes of the UK. Following the Second World War, policy makers from victorious allied powers, principally the US and UK, took up the task of thoroughly revamping the world monetary system for the non-communist world. The outcome was the so called “Bretton Woods System” and the birth of new supra-national institutions, the International Monetary Fund (the IMF or simply the “Fund”) and the World Bank.… Read the rest

Abey Francis