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There are a few different ways a country can use its monetary and fiscal policies to stabilize its economy from foreign exchange market changes. From a monetary policy perspective, a country could increase its money supply through a purchase of domestic assets, followed by a sale of foreign assets for domestic money in the foreign exchange market. This shifts the asset market equilibrium curve back towards its initial position (Krugman et al., 2018). As it relates to a country’s fiscal policy, Krugman et al. (2018) point out that a country could choose to prevent excess money demand by buying foreign assets with money, thus increasing the money supply and preventing the money demand from pushing up the home interest rate and appreciating its currency.
As for why it has been so difficult for Greece to address its debt, it sure seems to me like one driver is that the country’s past leadership put the country so far behind the eight ball by withholding critical information that directly impacted not only the country’s financial standing, but that of the Euro zone as a whole. I remember when the news reports started discussing Greece’s new government’s announcement of the country’s poor financial situation, and how infuriated members of the Euro zone were that another partner country had been “cooking the books” for long enough that a quick recovery was impossible. One key lesson to be learned from both a monetary and fiscal perspective, in my view, is that a country that is a member of a broader group such as the EMU cannot simply make buy and sell assets to prop up its currency and adjust the exchange rate, which means the country has to be on top of its financial and economic position – and not hide details that show poor standing and potential crisis.
References
Krugman, P. R., Obstfeld, M., & Melitz, M. (2018). International economics: theory and policy (11th ed.). Pearson
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The federal government has control of what is done with our monetary policies and fiscal policies. Whatever is done with these policies has control of what our incomes and imports/exports does. Whatever the number of these policies is will determine how high or low income will be predicted to be and how many exports/imports are expected. These policies are able to stabilize a country within these ranges as long as they are able to follow the steps correctly.
References:
Congressional Research Service. (2007, June 6). Fixed Exchange Rates and Floating Exchange Rates: What Have We Learned? EveryCRSReport.com. com/reports/RL31204.html.”>https://www.everycrsreport.com/reports/RL31204.html
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JMonetary and fiscal policies are often times necessary to stabilize a country’s economy. Depending on the condition of the economy, certain actions can be taken to either raise or lower the exchange rate. Expansionary policies such as lowering taxes or increasing the money supply, can lead to a depreciation in our exchange rate. Contractionary fiscal and monetary action has the opposite affect, and could include activities like raising interest rates or reducing the money supply. Part of the reason Greece got into it’s financial troubles recently is because of it’s entrance into the eurozone. It had regularly been running too high a deficit but ended up basically cheating it’s way in. Greece has considerably higher government spending than other countries considering its GDP. (Amadeo, Kimberly). Greece’s financial condition is a good reminder that money eventually has to be paid back. Government spending needs to be kept under control. You cannot just continue to spend money and rack up large amounts of debt. This can make it more difficult to obtain more credit and may put the country in a position where it’s at risk of defaulting on its loans.
Reference
Amadeo, Kimberly. (May 18, 2020). “Greek Debt Crisis Explained”. com/what-is-the-greece-debt-crisis-3305525“>https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525.
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