By George W. McKenzie (auth.)
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Extra info for The Economics of the Euro-Currency System
Third, reduction in costs also arises from the development of vehicle currencies. The fact that the dollar and a few other currencies account for the bulk of euro-currency activity means that banks need hire only specialists in these currencies. Fourth, typically euro-banks specialise in their operations, dealing only with customers well-known to them and hence possessing well-established credit ratings. Thus the risk of default on loans is less than it might otherwise be. In fact, typically euro-banks do not require any collateral for their loans, a situation which, of course, is advantageous to potential borrowers.
And as Silber5 has pointed out in turn, attempts to reduce uncertainty have lead to various innovations, such as the financial intermediation provided by the euro-currency system. By contrast, the neoclassical framework, based on the assumptions of perfect competition (including complete information and perfect foresight) that form the basis of this chapter's discussion, can provide only a first step in our understanding ofa very complex international financing system·t A THEORY OF INTERNATIONAL CAPITAL FLOWS INTERTEMPORAL DECISION-MAKING IN A CLOSED ECONOMY Although international capital flows have been an important element in the world economy for decades, the theory of capital movements is still in a very rudimentary state.
And since net additions to plant and equipment are occurring faster, productive capacity and economic growth will also be higher. However, as might be expected, such benefits are not to be obtained without a cost being involved. In this case, we find that financial intermediaries introduce a potential for financial instability that might not otherwise exist. There are two aspects to this difficulty: (I) The manner in which the intermediary transmits and amplifies THE ECONOMICS OF THE EURO-CURRENCY SYSTEM fluctuations originating in one sector of the economy to other sectors; and (2) The source of the original disturbance.