International Money and Finance

Spring 2022

1. Introduction

Prof. Philippe Bacchetta

HEC Lausanne
 Logistics
Two teachers:
• Philippe Bacchetta: week 1-5 and 13-14
• Margaret Davenport: week 6 to 12

• Assistant: Pascal Meichtry

• Schedule : Tuesdays 8h30-10h00 and 14h15-15h45

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 Logistics

• Moodle page: readings, slides, videos

– Not everything is on the slides

• Book: Montiel, International Macroeconomics, Wiley-

Blackwell, 2009
– Selected sections of the book are part of the course material

• Final exam: 70%; country report : 30% (due March 29)

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 Goals

1. Understanding of the international monetary and

financial environment
– Example: read the Financial Times, The Economist

2. Learn or review basic theoretical concepts

3. Historical perspective

4. Apply macroeconomic models

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 Goals
• This is a course in applied macroeconomics, with a finance
dimension

• The application is not easy as the topics are often complex

and abstract

• The goal is to give a structure of thoughts to understand a

complex environment

• John M. Keynes:
“Economics is a method rather than a doctrine, an
apparatus of the mind, a technique of thinking which helps its
possessor to draw correct conclusions” 5
 Our expectations

1. Learn basic concepts, including the historical

perspective

2. Understand the models presented in class + ability to

solve problems

• The exam will include questions on the concepts and

on problems to solve

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 Being ready for the exam
• Make sure you understand the material as we go along;
ask questions during the semester
• Read the recommended book sections
• Do the problem sets
• Follow global economic news
• Don’t wait the end of semester to get started

• The course is not hard, but the material accumulates

fast!

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 Main Topics

1. Exchange rates, interest rates

2. Macroeconomic policies

3. International Monetary System

4. Financial crises

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 Course Outline

• Balance of payments: ~ 2 lectures

• Exchange rates, interest rates: ~4 “
• International monetary system: ~4 “
• Macroeconomic policies: ~8 “
• Financial crises: ~4 “
• Excercises-project: ~6 “

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Longer perspective on Swiss franc/dollar

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 Comments on crypto-currencies

• Some argue that Bitcoin or other “crypto-currency” will

take the role of money
– And may even give rise to a global currency

• But cannot really be considered as currencies

– Not issued by central banks
– Limited use for transactions (except for illegal activities)
– Scope for manipulations

• Fluctuates wildly with other currencies

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• Works more like speculative assets
– But has no intrinsic value

• The “Mother of all bubbles”

• "a combination of a bubble, a Ponzi scheme and an

environmental disaster“, Agustin Carstens, general
manager of the BIS, 6.2.2018

• Some argue it is not really a Ponzi scheme, rather a

“pump-and-dump” scheme

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Bitcoin mining site, Kazakhstan
https://www.rts.ch/info/economie/12578147-plongee-inedite-dans-les-mines-geantes-du-bitcoin-au-kazakhstan.html

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• Exceptions: stable coins (e.g., Thether, Libra). Similar to
fixed exchange rates
– Facebook first proposed Libra, then Diem, then gave up the idea

• Unlikely to be sustainable: may collapse like a fixed

exchange rates (speculative attacks)

• This may threaten financial stability: need for supervision

and regulation

• But central banks could issue e-currencies: CBDC

(Central bank digital currencies)

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 Understanding CBDC

• Many microeconomic aspects

– Technology (blockchain?), connection with other systems,
anonymity

• Take a macroeconomic-monetary perspective since it is

money issued by the central bank

• Could substitute cash or bank deposits

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 Central bank balance sheet

Cash Cash: held by the public

Assets
Reserves: held by commercial
Reserves banks

The public holds banks deposits

Money = Cash + Bank Deposits

Monetary base = Cash + Reserves

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 Scenario 1: CBDC replaces cash

Central bank balance sheet with CBDC

Cash CBDC

Assets Assets
Reserves Reserves

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 Scenario 1: CBDC replaces cash
• Dramatic effect on monetary policy: the Zero Lower
Bound (ZLB) imposed by cash disappears
– Or Effective Lower Bound (ELB)

• The central bank can charge negative interest rate on

CBDC => can impose more negative policy rate
– More efficient monetary policy
– May increase income of central bank
– Might be easier for banks to charge negative rates

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 Scenario 1: CBDC replaces cash
• CDBC could be used for transfers: Monetary+fiscal policy

• But CBDC may not have same anonymity as cash

• Cash unlikely to fully disappear for now

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 Scenario 2: CBDC replaces bank deposits

Central bank balance sheet with CBDC

Cash Cash

Assets Reserves
Reserves
Assets

CBDC

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 Scenario 2: CBDC replaces bank deposits

Several options:
1. Held directly by households and firms who have an
account at the central bank
2. Held indirectly by households and firms through
accounts with financial intermediaries
3. Held by financial intermediaries

• Option 3, wholesale CBDC, is similar to traditional

reserves
– but would be more efficient

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 Scenario 2: CBDC replaces bank deposits

• Options 1 and 2 are retail CBDC and would directly

compete with banks

• Process of disintermediation: pressure on banks, with

fewer demand deposits. Reduces interest rate margins.

• May hurt lending and economic activity

• May increase financial instability if bank deposits can

easily be transformed into CBDC
– Troubles in the banking sector may be exacerbated by a “bank
run” to CBDC
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 Scenario 2: CBDC replaces bank deposits

• Several open questions

• What interest rate on CBDC?

• What does the central bank do with increased assets?

And increased revenues?

• Safe countries like Switzerland may attract huge demand

for CBDC. Size of central bank may explode

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 Outlook for CBDC
• CBDC can take many forms with different implications

• The effects depend on the size of CBDC and the

substitutability with bank deposits

• Central banks study and experiment with CBDC

– Some central banks have already introduced CBDC
– Some central banks (e.g., SNB) are running experiments with
wholesale CBDC
– BIS plays an active role

• But some central banks are skeptical (e.g., US Federal

Reserve)
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