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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 30 / 153

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-  All subject to periodic review:  If they haven't followed guidelines they lose additional funding or must accept an even more stringent set of guidelines.

99. Capital flight: A rapid and massive conversion of domestic currency for that of a major international reserve currency and movement of that reserve currency out of the country to an off-shore financial haven.  

- When devaluation is about to occur, the wealthy and powerful are the first to know:  The overvalued exchange rate means that at crisis point the domestic currency will exchange into a larger number of foreign currency per unit.  Economic reality => the national currency must depreciate => capital flight: helps to depreciate the domestic currency rapidly in a short period of time.

- This often creates volatile financial markets, increases risk, increases interest rates and reduces economic growth (often causing a recession).

-     Psychology imbedded in wealthy Latin culture to have one financial foot in and one financial foot out of home country. Also, the increasing presence of “foreign portfolio investment” is contributing the problem.

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