Inflation

- Hot money flows and investment  Higher return on savings.

- Demand for currency  currency appreciation with respect to other economies in
forex example aus,china,eu
- Price of exports (G&S) from currency app economies   Economies trading
experience imported inflation.
- Imported inflation worse than home grown, net drain on economy and harder to fix
by just raising interest rates.

Australia
- Australia biggest imports crude oil and petroleum products  price will increase…
converting to US dollars   passed to consumers.
- Australia’s heavy trade reliance on ETM imports which domestic industry cannot
cater for  Australian consumers left paying more for vehicles, cell phones,
computers.
- Employees ask for higher wages  creation of price wage spiral which has created
an internalised inflation effect also.  Stagflation 1970s.

China
- 2012 Data Main imports; crude oil, iron ore, plastics in primary form, copper ($500
billion).
- China has a large manufacturing base  Requires raw materials/STM’s in order to
produce large output volumes.
- Price of inputs into production   Output adversely effected  profits of the firm
  Unemployment 

Europe

- European union is a trade bloc which attempts to improve trade relations between
member nations.
- The effects of imported inflation will hence be minimised.
- Nonetheless over 10% of Imports come from external sources such as the USA and
China in areas such as manufactured goods  imported inflation effect will
propagate.
Debt
- Domestic banks borrow  fund lending activities.
- Governments borrow  fiscal policy / budget deficits.
- Private firms borrow  make investments to expand production  minimising the
cost of interest repayments  overseas may offer
- Global interest rates   Repayments  Debt   Money leaving the economy
 Hinders economic growth  Primary account deficit
- Lenders Currency  due to  interest rates by conventional models  Conversion
rates increase the amount of debt & Interest repayments also.

Australia

- Foreign debt $1 Trillion as of 2016

-  Interest rates  Interest repayments   Debit on primary income on current
account.
- Todays net foreign debt adds to future CADs  Between 1976 to 2016 4% of GDP to
60% of GDP  Unsustainable if shock occurs to interest rates which increases
primary account outflows.
- If Aus debt unsustainable  Lowers investor confidence  Loses AAA credit rating.
- Long term excessive debt  Debt sustainability problem  Vicious cycle debt trap
scenario  Intensified by increasing interest rates.

China

- 2017 external debt $1.7 Trillion, rose $300 billion from 2016.
-  Interest rates  Interest repayments   Debit on primary income on current
account.
- The rising external debt  stable economic growth  Pitchford thesis
- Increasing two-way movement the yuan exchange rate and the government's policies
to facilitate cross-border financing.
- External debt to GDP ratio of 14 per cent, impact on China can be deemed as
sustainable.

Europe

- EU's External Debt 121.0 % Nominal GDP 2017  $13 trillion USD.
- European debt crisis  multiyear debt crisis since 2009  Several members such as
Greece, Portugal unable to refinance debt without assistance of other Eurozone
countries and IMF
- Countries still recovering from crisis  Higher interest rates increase debt problem
 Create large sustainability issues for Eu in long run.
Output/Employment
- Economies raising interest rates   Exchange rate
- Price exports in these economies  Price ceteris parabis  Less competitive in the
global market
- Others in the global market will have an improvement in competitiveness of the
exports relative to such economies.
- Demand for domestic commodities   As prices increase elsewhere
- Demand shift  Quantity supplied increases  Higher levels of of output
- Trade balance surplus increases  reduces CAD.
- Ad as curve showing shift
-  Output  inputs into production required   Employment
- (Demand for labour curve)
- Judgement on positive effect.

Policy options

Generic
- Economies may eventually need to follow the rise in interest rates to keep attractive
as an investment destination.
- Aus, China, Europe, low interest rates  Cash reserves held as investor do not yield
high returns.
- These economies can do such through tight monetary policy in their respective
central banks.
- Open market operations  Limiting money supply through sale of bonds and
securities
- Central bank overnight cash rate   Banks less incentivised to hand out cash 
more return from keeping money in ESA’s
- Less inclined to borrow from other banks at this high rate  Look to gather funds
via deposit and build up reserves.
- Banks  their interest rates  Deferring from loaning  encouraging saving.
- Investing in Aus, Chinese, European banks returns   Demand for AUD, Yuan, Euro
  Currency   inflationary and debt problems solved to a degree.

China
- The Chinese utilise the currency peg of the Yuan.
- If the increase in global interest rates is deemed detrimental the People's
Bank of China engages in currency purchases to increase its exchange rate
to neglect the effect of higher import prices, relative to economies such as the
US who has seen currency appreciations in recent times due to its tighter
stance on monetary policy
- Debt and inflation solution

Europe
- Outright monetary transactions by Eu CB European Stability Mechanism  funds
in order to meet challenged of EU Debt crisis  From these funds Eu Bank can
purchase 1-3 year bonds  Provide short term unsustainable solution if debt is
adversely effected by rise in interest rates.
Australia
- Australia maintains its own holdings of foreign reserves and can ultilise such to flood
the market with other currencies to allow the dollar to appreciate relative to those
and increase demand for the dollar via speculation.
- Such can be used if international debt or inflation is creating probems in terms of the
current account deficit and as a last resort alternative to prevent Australia from
delving into unsustainable debt and CAD territory.