Exchange Rates and Interest Rates in Pakistan Analysis

Exchange Rates and Interest Rates in Pakistan Analysis Abstract This paper endeavors the relationship and the positive effect between exchange rates and interest rates in Pakistan by utilizing the foreign exchange market and current scenario of increasing interest rates because of increasing exchange rates to represent the economic position of Pakistan. The data by the researcher is all on daily basis for the above variables from the period of September 2001 to May 2008 for exchange rates, while for interest rates (6 month KIBOR) from the period of September 2001 to May 2008. The researcher implement regression model to test the effect of exchange rates progression on interest rates. So in this result, there is the issue of auto correlation exists and it shows the serial correlation between these variables. The issue should be resolved by taking time and KIBOR lag values as the dumm dependent variables. The study concludes on this way that there is the negative relationship between exchange rates and interest rates (KIBOR) in Pakistan and there i s the impact of time and KIBOR on KIBOR.. It identifies that when exchange rates increases, there is decreasing in interest rates (KIBOR). This results and relationship is consistent as predicted by Meese and Rogoff (1988). INTRODUCTION Every country has its own financial markets and it is the back bone of a countrys economy. The financial markets is divided in parts like foreign exchange market, stock market, money market, bond market etc. In this study, the researcher is focuses on the foreign exchange market, which is commonly known as Forex. It is the largest and most prolific part of financial market and defining the balancing of countrys economy, because every particular day, there are approximately one trillion amount of foreign exchange takes place in the countries around the world. The actual mechanism of the foreign exchange, that it is work as the main driving force for an any countys economy in the world. Therefore, any country in the world should challenge their currency in the global economic markets. In the exchange markets for all the countries, home country currencies trade with other foreign country currencies. The foreign exchange market system is needed for every developed and under developed cou ntry; this system known as currency in exchange determination. For the determination of the value of a currencys exchange rate, there are two main types of system is used, one is floating exchange rates system and the other is fixed exchange rates system. The intervention of government officials authorities in the foreign exchange market is to influence the exchange rate fluctuation as a worldwide phenomenon. The authorities intervene maintaining the objective to orderly market conditions that ultimately help to achieve the overall macroeconomic goals. However, the exchange rate has playing an important role in terms of the flexibility in macroeconomic framework to deal with changes in the external terms of trade, but the monetary policy also aims the national objectives of economic diversification and to support export competitiveness. The ineffective monetary policy under fixed exchange rates as compared to flexible exchange rates, but fiscal policy under both fixed and flexible exchange rates remains weaker of achieving the level of output. (R.A. Mundell, 1968). The level of currency risk changes, it has no negligible impact on the rates of change of exchange rates and on relatives rates of interest between currencies. (Clas Whilborg, 1982). The risk premium of the currency is the important factor relative to floating exchange rate system, but movements in the exchange rate are dominated by the non speculative activity and it has the adverse effect on world economy. (John bilson, 1985). The true statement that in many cases the sign of the estimated exchange rate-interest rate differential relationship is consistent with the possible predominance of financial market disturbance (R. Meese K. Rogoff, 1988). The consequences changes in the nominal interest rate reflect changes in the tightness of monetary policy. T he higher the interest rate in the country attracts the capital inflow, which causes the domestic currency appreciates, so this gets the relationship could be negative between the exchange rate and nominal interest rate differentials. (J.A. Frankel, 1979). The assets are dominated and exchange risks interest reflects the interest rate parity when different currencies affect political risk and thats why assets are issued in different currencies. Thus the interest differentials to the political risk of future capital control must be distinguished due to the effective tax that controls the place in interest earnings. (M.P. Dooley P. Isard, 1980). The concept of political risk is that the probability authority of the state will be interposed between investors in one country and investment opportunities in other countries that is the probability that controls the imposed on capital flows. (R.Z. Aliber, 1973). If price levels and exchange rate are significantly volatile and cannot be cos tly hedged, are adversely affected in the real value of the domestic currency. There is some evidence that exchange rate fluctuations are a priced factor in cross sections of stock return converted into a common currency. (W. Bailey P. Chung, 1995). In the perfect mobility the exchange rate movements and an adjustment of goods market is relative to asset market and consistent expectations. The extends that output responds to a monetary expansion in the short run, this acts as an effect on exchange depreciation which lead to an increase in interest rates. (Rudiger Dornbusch, 1976). The foreign exchange gain or loss is made in the course of covering; consider being capital assets, so this gain or loss treated on capital account. This shows the highly sensitive interest dynamics with exchange rates. (M.D. Levi, 1977). The variability of industrial production output will be higher in the regime of fixed exchange rates instead of regime of flexible exchange rates. (Flood Hodrick, 1986) . The effect of consumption goods purchases by the government is not the private utility, but per capita real government expenditure are the composite of individual consumption of goods. So notice that the demand of money its depends on consumption of goods rather than income and that is the important distinction of closed economies.(Obstfeld Rogoff, 1995). The fixed and floating exchange rates depend on higher welfare yield and on the nature of sticky prices, so the risk would be shared and there are some opportunities to aware. The evidence, which should give opportunities about price setting and risk sharing are not refined and not to make the definite conclusions for the optimal regime of the exchange rate of that country. There are three types of ways which gives stickiness in prices, the prices which would set by the firms in their own currencies, the firms would set the prices for consumers currencies, or firms would set the prices in the currencies of producers. (Charles En gel, 2001). When the exchange rates changes, it may cause to appear the changes in relative prices and make to generate additional uncertainty for equilibrium in markets. However, there is also defining that the changes in terms of trade would play the larger role of changes in the exchange rates which affect the variability of exchange rates. (A.C. Stockman, 1980). This study explores to investigate the determinants of exchange rates in developing country such as Pakistan. The framework of this study is concern to be conceptual and theoretical and is to set up the ground of unidirectional causality from exchange rates to economy. In principal, it determines the exchange rates relationship with interest rates so it will spurs the determinants in Pakistan with related to the economy. This view implies that the choice of an exchange rates regime be a relatively simple, if countries were faced to intervene regularly in the foreign exchange market to stabilize, therefore the monetary authorities intervene with the objective of maintaining orderly market conditions, which ultimately help to achieve the overall macroeconomic goals. The discretionary nature of the existing monetary policy in Pakistan is inflation, and it is targeting to hit on the Pakistani economy by focusing attention on the monetary policy. So the government of Pakistan is to make t heir monetary policy more transparent for achieving their explicit goal, and decreasing the inflation. Therefore, it is increasing the publics understanding of the central banks strategy to deliver the target, so the State Bank of Pakistan will help to provide an anchor for inflation expectations in the economy. The State Bank of Pakistan (SBP) has accorded a high priority to achieving a low rate of inflation, and the monetary policy also aims to support the objectives of the national country of Pakistan to meet their diversified economy and competitiveness in the export from other countries of the world. This study will also helpful to the SBP to developed their awareness of the relationship of exchange rates with KIBOR, so SBP may observed the controversy of their ups and downs fluctuations so it may controlled significantly. The bank treasury department should get the help because, they have continuously meet the exchange rates and make transactions of the countrys currency with others country currencies, so it should make them identify that if exchange rates increases or decreases it should not make effect on interest rates but their should be some inverse effect in nature. This effect should create controversy in the country economy so the central bank should make some authorized decisi on to controlled the exchange rates and interest rates The thesis is structures as follows. Chapter II provides literature review. Chapter III defines the outline of variables, their sample size, data sources and its formatting and the model. Chapter IV explains our findings and results. Finally Chapter V reports conclusion Chapter II Literature Review: This study relates to examine the relationship and effect between exchange rates with interest rates. Numbers of studies have done by the researchers, Robert A. Mundell, (1961), Bela Balassa (1964), Robert Z. Aliber, (1973), Rudiger Dornbusch, (1976), Richard A. Meese Kenneth Rogoff (1982), H.M.S Gerlach (1988), to investigate the determinants of exchange rates have applied in the world exchange rates market and help for different countries in their market development and economic growth. Researchers attempted to exemplify whether, how and to what extent the determinants of exchange rates market can contribute to the process of economic growth. Purchasing Power Parity Theory: The purchasing power parity theory doctrine means different things to different people. It has two versions of this theory that can be called the absolute and the relative interpretation. The first version of purchasing power theory calculated as a ratio of consumer goods prices for any country would tend to the equilibrium rates of exchange. In the second version of relative interpretation the rate of exchange rate would be determined between two countries and quoted with general levels of prices of two countries. It amend the international trade theory which would be the part of PPP, in which introducing the non-traded goods (services), but the advantage is greater in regards of traded goods than non-traded goods, because of the assumptions of marginal rates of transformation. The relationship between purchasing power parity and exchange rates provides the international comparison of national incomes and living standards (Bela Balassa, 1964). (Lawrence H. Officer, 1976) is the rese archer which gave another review of this purchasing power parity theory. It has define two applications in economics, the first application use of the conversion factor to transfer the data in one national way to another. The use of PPP is mainly the body of (index number theory) and applications of GDP that have improved over the years and path breaking studies in the area continue to appear. The second application of PPP has not the widespread acceptance, which has remained the unsophisticated applications. A.C. Stockman, (1980), develops the model of determination of exchange rates and prices of goods. The changes in prices of goods due to supply and demand would affect the changes in exchange rates with deviations of purchasing power parity. The changes in exchange rates have failed to resemble the changes in prices of goods, because exchange rates more volatile than prices levels and inflation rates. The research proposes the equilibrium of exchange rates behavior and different international goods that would have been traded. This relationship cannot be exploited by the government, because the greater the changes in terms of trade the larger the changes in exchange rates variability. The deviations from PPP persist that variation of exchange rates more than ratios of price indexes. The results found the two interpretation of the relationship between exchange rates and terms of trade. In the first, the causes that affect the changes in exchange rates would also affect the change in te rms of trade because prices of goods do not adjust to clear the markets. This interpretation would also found in the research of Dornbusch (1976), and Isard (1977), they formally differentiates the system with respect to exchange rates and allow prices to change but not the changing in asset stocks. The another interpretation presented the elasticity approach of the foreign exchange market and the relation between the trade and exchange rates. Real supply and demand shocks affect prices and the derived demand of exchange rates. The affect of such a shift has the advantage to raise the value of currency in terms of foreign currencies relative PPP. These changes in demand for foreign exchange would result the supply and demand shocks and that should affect the equilibrium of exchange rates. In second interpretation the expected rate of change of exchange rates revealed on the forward foreign exchange market. This should be related the anticipated change in the terms of trade and the i nflation differentials. A persuasive argument about the level of exchange rates is only associated with not causes of the relative prices changes. Clas Wihlborg, (1982), examined the relation of interest rates, exchange rate and currency risks in this research. It identifies the test which empirically impact of currency on interest rates and exchange rates. In this research there are three different ways in which the importance of currency risks for interest rate and exchange rate determination. First different risk characteristics of assets denominated in different currencies. Second changes in the level of risks that affect the elastic ties of substitutes among different assets and the monetary policy. Third changes in the level of risks on alternative assets which have a direct impact on rates of return. This research used the three specifications of the dependent variable to test the theory, firstly the rates of return is adjusted for the expected rate of changes in the exchange rates, second difference between nominal rates of interest and third rate of change of deviation from the exchange rate. The results presented here that substantiate the changes in the level of currency risk have a non-negligible impact on the rates of change of exchange rates and on relatives rates of interest between currencies. The risks explain the small share of variation in these variables. Another results indicate that the nominal interest rate seem to adjust in fiscal policies and savings behavior but not affect real rates of interest. But changes in relative risks level would affect relative rates on interest these changes still be important for the substitutability between assets of different currency denominations. Richard Meese Kenneth Rogoff, (1983), analysis the out of sample forecasting accuracy on various models. It estimated the horizons of the dollar with different country currencies, like Dutch mark, Japanese yen, and Britain pound that traded to weight the dollar exchange rates. Its also studied the flexible exchange rates with the monetary models of sticky price, so the model of sticky price, which incorporates the current account. The first model is structural models in which it requires to generate the forecasts of exchange rates and explanatory variables. It contains the explanatory power, but its predicted badly because the explanatory variables are difficult to predict. The second is the univariate times series model in which identify a variety of prefiltering techniques involve differencing, de-seasonalizing and removing time trends. The relative performance of these techniques is of interest in itself. The third model use is the random walk model; it should also link with this univariate time series model. It uses as the predictor of the current spot rate with the entire future spot rate, and it requires no estimation. In this research the performance of estimated univariate time series models or candidate structural model is so worse. From a methodological stand point the view that the out of sample model fit is an important criterion when evaluating exchange rate, but the estimation of out of sample is failure with time series models, that are well approximated the major country exchange rates. John Bilson, (1985), gives the empirical findings about macro economic and flexible exchange rate of the U.S dollar related to PPP theory. From the perspective of this research in which sluggish price adjustment in the commodity markets resulted in increased variability in exchange rates. For the demonstration of result it is important because the instability of floating exchange rate could be due to the inherent differences between commodity and foreign exchange markets. The determination of the expected future rate is impossible, because it is more difficult to reject the forward parity condition. The major part of the forward parity is the variation in the premium is due to the forecast. The object of this research is to determine that if the forward parity failed is the cause of instability in the same way that the failure of purchasing power parity. The findings develop that currency risk premium is the important factor relative to floating rate system, and movement in the excha nge rate are dominated by the non speculative activity and it has the adverse effect on world economy. Roger D. Huang, (1987), evaluate that the expected change in the exchange rate of two countries equals the expected differentials in their inflation rats over the same holding period. It makes the empirical evidence link with PPP theory and obtained that the changes in expected nominal exchange rate is appear to deviate inflation rate systematically. It relates the PPP based on the constraint that, in efficient market the net return to speculators engaging in speculation on goods in the foreign country. The purpose of this research is to know the equality restriction between expected nominal exchange rate and expected inflation rate differentials. The investigation should have the result that the evidence is inconsistent with the current floating exchange rates over the major industrialized countries. Since the test perform meaningful in conjunction with market efficiency and simply indicate the failure expectations. John Doukas Abdul Rahman, (1987), conducted the unit root test for the presence of evidence from the foreign exchange futures market, and gets the representation of foreign exchange currency future prices. The research describes the procedure from the foreign exchange future markets on five different currencies with varying maturity. It was found that presence in the series may cause the OLS estimates and its true value leading to errors, for small sample sizes the model has smaller forecast error. The process generate the log of currencies future rates by random walk, and it is consistent with other model of asset price determination that they imply the mean and dispersion of returns that don not change over short time period. But in general if follow the random walk; it is line with (Meese Singletons) findings from the spot and forward exchange market. H.J. Edison, (1987), addresses that whether PPP is valid in the long run movements in exchange rates, though it is failed in the short run. However number of studies was conduct for the behavior of exchange rates, Alder Lehmann (1983), Frankel (1986), developed more statistical techniques to examine the validity of exchange rates in the long run. Both of these have provided the evidence that PPP does not hold the exchange rates behavior in the long run. This research also incorporates the error correction mechanism and discusses the empirical results which generally show the result of failure of exchange rate support by PPP in the long run. In general, the result indicates the force which exists in the economy for driving the exchange rates towards the PPP equilibrium. The main conclusion from this research is the PPP relationship does not represents the exchange rates n the long run holding, so that the PPP permanent deviations cannot ruled out. This shows the reinforcement of PPP theory that was tested the fixed rate counterpart and the equalization of prices across countries, and it supports an interpretation of the PPP doctrine. This proportionality between the exchange rates and price level emerges in the long run. Richard Meese Kenneth Rogoff, (1988), examined the relationship between real exchange rates and real interest rate differentials from different countries. It based on the joint hypothesis that the prices of the domestic currency are sticky and the disturbances of monetary policy are predominant, which would found the little evidence of a stable relationship between interest rates and exchange rates. It is true that in many cases the sign of the estimated exchange rate and interest rate differential relationship is consistent with the possible predominance of financial market disturbances, but the relationship is not stable enough to be statistically significant. In Quasi reduced form real exchange rate models, examined the real versions of alternative rational expectations monetary models of exchange rate determination. In the nominal rate models, the exchange rate depends on fundamentals such as relative national money supplies, real incomes, short-term interest rates, expected inf lation differentials, and cumulated trade balances. The rationale view for this approach is that the nominal exchange rates poor performance is primarily attributable to money demand disturbances, so it can define the close relationship between there real interest differentials and real exchange rates, because, in the class of monetary models considered here, unanticipated money demand disturbances affect both variables proportionately. Feinberg Seth Kaplan, (1992), evaluate and interacts the real exchange rates index expectations is developed and used to explore the role of determination on domestic producer prices. The fact that time path of the exchange rate will directly affect the input costs, and the price of substitutes strongly. To examine the links between both actual and anticipated movements in the dollar and relative domestic producer prices, it chooses to analyze price responses to real exchange rate changes. The effect is dependent on the nature of substitutability between imports and domestic goods. The major finding is that the period of appreciation and depreciation over the past 10 years to inhibit the pass through in to domestic prices. In depreciation the market share to enjoy the continued good times kept prices other than expected. Warren Bailey Peter Chung, (1995), considers the study that the impact of fluctuations on exchange rates and political risk is on the risks premium and is reflected the individual equity returns. It suggests the factors which is common for emerging market equity, currency and debt markets, and make empirical implications to evaluate corporate and portfolio management. If price levels and exchange rate are significantly volatile and cannot be costly hedged, are adversely affected in the real value of the domestic currency. Some evidence that exchange rate fluctuations are a priced factor in cross sections of stock return converted into a common currency. The purpose of this research is to explore the impact of fluctuations on exchange rates and political risk which is consider on stock process of individual companies from the same country. The extent of measurement is that, which exposure factors explain cross sections of returns on individual securities and industry portfolios. The result suggests that the exchange rates and political risks could be significant in equity markets. The result also suggests that the risk premium can be time varying and not be detected by assuming constantly. This research shows the results that it did not find the evidence of the equity market premiums for the currency and political risk. It complements the importance to attach the exchange rates and political risk in the international finance. J.R. Lothian M.P. Taylor, (1996), examines the real exchange rate behavior, and explains the variations in sample of stationary univariate equations in real exchange rates. It investigates the additional insight in the exchange rates behavior that can be gained by considering the floating rate from the perspective of the data. These issues can be best understood on the subject of real exchange rates stability between the currencies of the major industrialized countries. Some of the pre-float studies support the fairly stable exchange rates in the long run. Subsequently, Dornbusch (1976), Frenkel (1981), gave largely as the result of studies published, and reject the hypothesis of random walk behavior of real exchange rates. The PPP shows the empirical movements in real exchange rates were highly persistent and effective; although the PPP is reject the hypothesis of non-stationary behavior of real exchange rates in the long run. The result of this research shows that the longest span of two countries exchange rates are significantly mean reverting. The first model result indicates the 80 percent of the variation in the exchange rates of the history data of two countries. By using of another model, the results explaining the performance of remarkably well in the floating, so that they produce better forecasts of the actual exchange rates. In line with recent studies, it fined that this process of mean reverting is quit slow, with estimated adjustment of data. In the long run the PPP equilibrium is remaining a useful empirical approximation. The deviations of the PPP that observe are consistent with the existence of slowly mean reverting influences, which may be real or monetary regimes. Theory of Optimum Currency Areas: The theory of optimum currency areas, which is usually presented the other name called flexible exchange rate system, but it is proponents as a device of depreciation that take the place of unemployment when the balance of payment is deficit and appreciation when it replace inflation when it is surplus. The problem can be exposed and more revealing by defining a currency area within when exchange rates are fixed. To this three answer can be given; first certain parts of the world are going processes of economic integration, so new experience can be made and at what constitutes the optimum currency area can give the meaning of these experiments. Second those countries that have flexible exchange rates are likely to face problems with the theory of optimum currency areas, so it does not coincide the optimum currency areas with the national currency. Third the idea that illustrates the functions of currencies which have been treated in economic literature, and sometimes neglected in the problems of economic policy. In the currency area, different currency countries including national country currencies interact pace of employment in deficit, because there is the willingness to inflation by the surplus countries. The argument for flexible exchange rate system is based on national currencies, and is valid about mobility of factor, so if it is high in the country and low in the foreign countries, the flexible exchange rates system on home country currencies might work effectively. The concept of optimum currency area has practically applicable only in those areas, where the state has the political organization in the country. The factor mobility is most considered is more relative rather than absolute concept, with both industrial and geographical. It likely to change the alterations with time over time in conditions, where the conditions of political and economic stability. Money is the convenience that restricts the optimum number of currencies, so in terms of this argument the optimum currency area which is composed in number of countries. (Robert A. Mundell, 1961). In another review the author defines the stabilization of capital mobility policy under the exchange rates which is fixed and flexible in the currencies markets; it concerns the theoretical and practical approach of the increased mobility of capital. The assumption is that the interest rate differentials from the level of abroad cannot maintain by the country, if there is the degree of mobility. The securities system are perfect substitutes, because different currencies are involved can be taken in the perfect mobilization, and there exchange rates expected to persist indefinitely, but the forward and spot exchange rate are identical. It identify the monetary and fiscal policy, in which monetary policy assumed the open market purchase of securities while fiscal policy is to form of increase in government spending and financed by an increased in public debt. Its effect the floatin g exchange rate result when monetary policy does not intervene in the exchange market, but it intervene the fixed exchange rates, when the buying and selling of international reserves at the rate of fixed price. The results of this research analyze that, the fixed exchange rates is become a device for the monetary policy and for the levels of reserve, whereas the flexible exchange rates becomes a device for the fiscal policy and for the balance of trade, but policies are unaffected to the level of output and employment. The fixed exchange rates in the perfect mobility will lead to the breakdown as the absence of gold sterilization. The gold sterilization is frustrated the capital outflows and offsetting monetary changes through the exchange rates equalization. The conclude remarks is that, the fixed exchange rates as compared to flexible exchange rates is ineffective under monetary policy, but in fiscal policy both the exchange rates either fixed or flexible are remains weaker for a chieving the level of output. The flexible exchange rates under fiscal policy to play some role in employment policy that can be expected, while monetary policy can have influence on output under fixed exchange rates. In this possibility existing, it wills lesser extent in the future. (R.A. Mundell, 1968). J.H. Makin, (1978), analysis the way to deal the risks involved in foreign exchange currency positions but exchange rates are uncertain. It incorporates the exchange rate changes with the changes in the determination of overall hedging strategy. The purpose is to survey the literature rather to examine the logic on hedge no hedge strategy and to suggest the viewing problem of exchange risk. It identifies the exchange risk diversification in two groups. First diversification investigates the exchange risk with the investor point of view selecting the locations of firms in different countries which denominated in different currencies. The second considers exchange risk with the firm manager point of view to decrease the impact of exchange rate fluctuations. The study concentrates the exchange risk and not overall corporate risk, so the analysis of co Exchange Rates and Interest Rates in Pakistan Analysis Exchange Rates and Interest Rates in Pakistan Analysis Abstract This paper endeavors the relationship and the positive effect between exchange rates and interest rates in Pakistan by utilizing the foreign exchange market and current scenario of increasing interest rates because of increasing exchange rates to represent the economic position of Pakistan. The data by the researcher is all on daily basis for the above variables from the period of September 2001 to May 2008 for exchange rates, while for interest rates (6 month KIBOR) from the period of September 2001 to May 2008. The researcher implement regression model to test the effect of exchange rates progression on interest rates. So in this result, there is the issue of auto correlation exists and it shows the serial correlation between these variables. The issue should be resolved by taking time and KIBOR lag values as the dumm dependent variables. The study concludes on this way that there is the negative relationship between exchange rates and interest rates (KIBOR) in Pakistan and there i s the impact of time and KIBOR on KIBOR.. It identifies that when exchange rates increases, there is decreasing in interest rates (KIBOR). This results and relationship is consistent as predicted by Meese and Rogoff (1988). INTRODUCTION Every country has its own financial markets and it is the back bone of a countrys economy. The financial markets is divided in parts like foreign exchange market, stock market, money market, bond market etc. In this study, the researcher is focuses on the foreign exchange market, which is commonly known as Forex. It is the largest and most prolific part of financial market and defining the balancing of countrys economy, because every particular day, there are approximately one trillion amount of foreign exchange takes place in the countries around the world. The actual mechanism of the foreign exchange, that it is work as the main driving force for an any countys economy in the world. Therefore, any country in the world should challenge their currency in the global economic markets. In the exchange markets for all the countries, home country currencies trade with other foreign country currencies. The foreign exchange market system is needed for every developed and under developed cou ntry; this system known as currency in exchange determination. For the determination of the value of a currencys exchange rate, there are two main types of system is used, one is floating exchange rates system and the other is fixed exchange rates system. The intervention of government officials authorities in the foreign exchange market is to influence the exchange rate fluctuation as a worldwide phenomenon. The authorities intervene maintaining the objective to orderly market conditions that ultimately help to achieve the overall macroeconomic goals. However, the exchange rate has playing an important role in terms of the flexibility in macroeconomic framework to deal with changes in the external terms of trade, but the monetary policy also aims the national objectives of economic diversification and to support export competitiveness. The ineffective monetary policy under fixed exchange rates as compared to flexible exchange rates, but fiscal policy under both fixed and flexible exchange rates remains weaker of achieving the level of output. (R.A. Mundell, 1968). The level of currency risk changes, it has no negligible impact on the rates of change of exchange rates and on relatives rates of interest between currencies. (Clas Whilborg, 1982). The risk premium of the currency is the important factor relative to floating exchange rate system, but movements in the exchange rate are dominated by the non speculative activity and it has the adverse effect on world economy. (John bilson, 1985). The true statement that in many cases the sign of the estimated exchange rate-interest rate differential relationship is consistent with the possible predominance of financial market disturbance (R. Meese K. Rogoff, 1988). The consequences changes in the nominal interest rate reflect changes in the tightness of monetary policy. T he higher the interest rate in the country attracts the capital inflow, which causes the domestic currency appreciates, so this gets the relationship could be negative between the exchange rate and nominal interest rate differentials. (J.A. Frankel, 1979). The assets are dominated and exchange risks interest reflects the interest rate parity when different currencies affect political risk and thats why assets are issued in different currencies. Thus the interest differentials to the political risk of future capital control must be distinguished due to the effective tax that controls the place in interest earnings. (M.P. Dooley P. Isard, 1980). The concept of political risk is that the probability authority of the state will be interposed between investors in one country and investment opportunities in other countries that is the probability that controls the imposed on capital flows. (R.Z. Aliber, 1973). If price levels and exchange rate are significantly volatile and cannot be cos tly hedged, are adversely affected in the real value of the domestic currency. There is some evidence that exchange rate fluctuations are a priced factor in cross sections of stock return converted into a common currency. (W. Bailey P. Chung, 1995). In the perfect mobility the exchange rate movements and an adjustment of goods market is relative to asset market and consistent expectations. The extends that output responds to a monetary expansion in the short run, this acts as an effect on exchange depreciation which lead to an increase in interest rates. (Rudiger Dornbusch, 1976). The foreign exchange gain or loss is made in the course of covering; consider being capital assets, so this gain or loss treated on capital account. This shows the highly sensitive interest dynamics with exchange rates. (M.D. Levi, 1977). The variability of industrial production output will be higher in the regime of fixed exchange rates instead of regime of flexible exchange rates. (Flood Hodrick, 1986) . The effect of consumption goods purchases by the government is not the private utility, but per capita real government expenditure are the composite of individual consumption of goods. So notice that the demand of money its depends on consumption of goods rather than income and that is the important distinction of closed economies.(Obstfeld Rogoff, 1995). The fixed and floating exchange rates depend on higher welfare yield and on the nature of sticky prices, so the risk would be shared and there are some opportunities to aware. The evidence, which should give opportunities about price setting and risk sharing are not refined and not to make the definite conclusions for the optimal regime of the exchange rate of that country. There are three types of ways which gives stickiness in prices, the prices which would set by the firms in their own currencies, the firms would set the prices for consumers currencies, or firms would set the prices in the currencies of producers. (Charles En gel, 2001). When the exchange rates changes, it may cause to appear the changes in relative prices and make to generate additional uncertainty for equilibrium in markets. However, there is also defining that the changes in terms of trade would play the larger role of changes in the exchange rates which affect the variability of exchange rates. (A.C. Stockman, 1980). This study explores to investigate the determinants of exchange rates in developing country such as Pakistan. The framework of this study is concern to be conceptual and theoretical and is to set up the ground of unidirectional causality from exchange rates to economy. In principal, it determines the exchange rates relationship with interest rates so it will spurs the determinants in Pakistan with related to the economy. This view implies that the choice of an exchange rates regime be a relatively simple, if countries were faced to intervene regularly in the foreign exchange market to stabilize, therefore the monetary authorities intervene with the objective of maintaining orderly market conditions, which ultimately help to achieve the overall macroeconomic goals. The discretionary nature of the existing monetary policy in Pakistan is inflation, and it is targeting to hit on the Pakistani economy by focusing attention on the monetary policy. So the government of Pakistan is to make t heir monetary policy more transparent for achieving their explicit goal, and decreasing the inflation. Therefore, it is increasing the publics understanding of the central banks strategy to deliver the target, so the State Bank of Pakistan will help to provide an anchor for inflation expectations in the economy. The State Bank of Pakistan (SBP) has accorded a high priority to achieving a low rate of inflation, and the monetary policy also aims to support the objectives of the national country of Pakistan to meet their diversified economy and competitiveness in the export from other countries of the world. This study will also helpful to the SBP to developed their awareness of the relationship of exchange rates with KIBOR, so SBP may observed the controversy of their ups and downs fluctuations so it may controlled significantly. The bank treasury department should get the help because, they have continuously meet the exchange rates and make transactions of the countrys currency with others country currencies, so it should make them identify that if exchange rates increases or decreases it should not make effect on interest rates but their should be some inverse effect in nature. This effect should create controversy in the country economy so the central bank should make some authorized decisi on to controlled the exchange rates and interest rates The thesis is structures as follows. Chapter II provides literature review. Chapter III defines the outline of variables, their sample size, data sources and its formatting and the model. Chapter IV explains our findings and results. Finally Chapter V reports conclusion Chapter II Literature Review: This study relates to examine the relationship and effect between exchange rates with interest rates. Numbers of studies have done by the researchers, Robert A. Mundell, (1961), Bela Balassa (1964), Robert Z. Aliber, (1973), Rudiger Dornbusch, (1976), Richard A. Meese Kenneth Rogoff (1982), H.M.S Gerlach (1988), to investigate the determinants of exchange rates have applied in the world exchange rates market and help for different countries in their market development and economic growth. Researchers attempted to exemplify whether, how and to what extent the determinants of exchange rates market can contribute to the process of economic growth. Purchasing Power Parity Theory: The purchasing power parity theory doctrine means different things to different people. It has two versions of this theory that can be called the absolute and the relative interpretation. The first version of purchasing power theory calculated as a ratio of consumer goods prices for any country would tend to the equilibrium rates of exchange. In the second version of relative interpretation the rate of exchange rate would be determined between two countries and quoted with general levels of prices of two countries. It amend the international trade theory which would be the part of PPP, in which introducing the non-traded goods (services), but the advantage is greater in regards of traded goods than non-traded goods, because of the assumptions of marginal rates of transformation. The relationship between purchasing power parity and exchange rates provides the international comparison of national incomes and living standards (Bela Balassa, 1964). (Lawrence H. Officer, 1976) is the rese archer which gave another review of this purchasing power parity theory. It has define two applications in economics, the first application use of the conversion factor to transfer the data in one national way to another. The use of PPP is mainly the body of (index number theory) and applications of GDP that have improved over the years and path breaking studies in the area continue to appear. The second application of PPP has not the widespread acceptance, which has remained the unsophisticated applications. A.C. Stockman, (1980), develops the model of determination of exchange rates and prices of goods. The changes in prices of goods due to supply and demand would affect the changes in exchange rates with deviations of purchasing power parity. The changes in exchange rates have failed to resemble the changes in prices of goods, because exchange rates more volatile than prices levels and inflation rates. The research proposes the equilibrium of exchange rates behavior and different international goods that would have been traded. This relationship cannot be exploited by the government, because the greater the changes in terms of trade the larger the changes in exchange rates variability. The deviations from PPP persist that variation of exchange rates more than ratios of price indexes. The results found the two interpretation of the relationship between exchange rates and terms of trade. In the first, the causes that affect the changes in exchange rates would also affect the change in te rms of trade because prices of goods do not adjust to clear the markets. This interpretation would also found in the research of Dornbusch (1976), and Isard (1977), they formally differentiates the system with respect to exchange rates and allow prices to change but not the changing in asset stocks. The another interpretation presented the elasticity approach of the foreign exchange market and the relation between the trade and exchange rates. Real supply and demand shocks affect prices and the derived demand of exchange rates. The affect of such a shift has the advantage to raise the value of currency in terms of foreign currencies relative PPP. These changes in demand for foreign exchange would result the supply and demand shocks and that should affect the equilibrium of exchange rates. In second interpretation the expected rate of change of exchange rates revealed on the forward foreign exchange market. This should be related the anticipated change in the terms of trade and the i nflation differentials. A persuasive argument about the level of exchange rates is only associated with not causes of the relative prices changes. Clas Wihlborg, (1982), examined the relation of interest rates, exchange rate and currency risks in this research. It identifies the test which empirically impact of currency on interest rates and exchange rates. In this research there are three different ways in which the importance of currency risks for interest rate and exchange rate determination. First different risk characteristics of assets denominated in different currencies. Second changes in the level of risks that affect the elastic ties of substitutes among different assets and the monetary policy. Third changes in the level of risks on alternative assets which have a direct impact on rates of return. This research used the three specifications of the dependent variable to test the theory, firstly the rates of return is adjusted for the expected rate of changes in the exchange rates, second difference between nominal rates of interest and third rate of change of deviation from the exchange rate. The results presented here that substantiate the changes in the level of currency risk have a non-negligible impact on the rates of change of exchange rates and on relatives rates of interest between currencies. The risks explain the small share of variation in these variables. Another results indicate that the nominal interest rate seem to adjust in fiscal policies and savings behavior but not affect real rates of interest. But changes in relative risks level would affect relative rates on interest these changes still be important for the substitutability between assets of different currency denominations. Richard Meese Kenneth Rogoff, (1983), analysis the out of sample forecasting accuracy on various models. It estimated the horizons of the dollar with different country currencies, like Dutch mark, Japanese yen, and Britain pound that traded to weight the dollar exchange rates. Its also studied the flexible exchange rates with the monetary models of sticky price, so the model of sticky price, which incorporates the current account. The first model is structural models in which it requires to generate the forecasts of exchange rates and explanatory variables. It contains the explanatory power, but its predicted badly because the explanatory variables are difficult to predict. The second is the univariate times series model in which identify a variety of prefiltering techniques involve differencing, de-seasonalizing and removing time trends. The relative performance of these techniques is of interest in itself. The third model use is the random walk model; it should also link with this univariate time series model. It uses as the predictor of the current spot rate with the entire future spot rate, and it requires no estimation. In this research the performance of estimated univariate time series models or candidate structural model is so worse. From a methodological stand point the view that the out of sample model fit is an important criterion when evaluating exchange rate, but the estimation of out of sample is failure with time series models, that are well approximated the major country exchange rates. John Bilson, (1985), gives the empirical findings about macro economic and flexible exchange rate of the U.S dollar related to PPP theory. From the perspective of this research in which sluggish price adjustment in the commodity markets resulted in increased variability in exchange rates. For the demonstration of result it is important because the instability of floating exchange rate could be due to the inherent differences between commodity and foreign exchange markets. The determination of the expected future rate is impossible, because it is more difficult to reject the forward parity condition. The major part of the forward parity is the variation in the premium is due to the forecast. The object of this research is to determine that if the forward parity failed is the cause of instability in the same way that the failure of purchasing power parity. The findings develop that currency risk premium is the important factor relative to floating rate system, and movement in the excha nge rate are dominated by the non speculative activity and it has the adverse effect on world economy. Roger D. Huang, (1987), evaluate that the expected change in the exchange rate of two countries equals the expected differentials in their inflation rats over the same holding period. It makes the empirical evidence link with PPP theory and obtained that the changes in expected nominal exchange rate is appear to deviate inflation rate systematically. It relates the PPP based on the constraint that, in efficient market the net return to speculators engaging in speculation on goods in the foreign country. The purpose of this research is to know the equality restriction between expected nominal exchange rate and expected inflation rate differentials. The investigation should have the result that the evidence is inconsistent with the current floating exchange rates over the major industrialized countries. Since the test perform meaningful in conjunction with market efficiency and simply indicate the failure expectations. John Doukas Abdul Rahman, (1987), conducted the unit root test for the presence of evidence from the foreign exchange futures market, and gets the representation of foreign exchange currency future prices. The research describes the procedure from the foreign exchange future markets on five different currencies with varying maturity. It was found that presence in the series may cause the OLS estimates and its true value leading to errors, for small sample sizes the model has smaller forecast error. The process generate the log of currencies future rates by random walk, and it is consistent with other model of asset price determination that they imply the mean and dispersion of returns that don not change over short time period. But in general if follow the random walk; it is line with (Meese Singletons) findings from the spot and forward exchange market. H.J. Edison, (1987), addresses that whether PPP is valid in the long run movements in exchange rates, though it is failed in the short run. However number of studies was conduct for the behavior of exchange rates, Alder Lehmann (1983), Frankel (1986), developed more statistical techniques to examine the validity of exchange rates in the long run. Both of these have provided the evidence that PPP does not hold the exchange rates behavior in the long run. This research also incorporates the error correction mechanism and discusses the empirical results which generally show the result of failure of exchange rate support by PPP in the long run. In general, the result indicates the force which exists in the economy for driving the exchange rates towards the PPP equilibrium. The main conclusion from this research is the PPP relationship does not represents the exchange rates n the long run holding, so that the PPP permanent deviations cannot ruled out. This shows the reinforcement of PPP theory that was tested the fixed rate counterpart and the equalization of prices across countries, and it supports an interpretation of the PPP doctrine. This proportionality between the exchange rates and price level emerges in the long run. Richard Meese Kenneth Rogoff, (1988), examined the relationship between real exchange rates and real interest rate differentials from different countries. It based on the joint hypothesis that the prices of the domestic currency are sticky and the disturbances of monetary policy are predominant, which would found the little evidence of a stable relationship between interest rates and exchange rates. It is true that in many cases the sign of the estimated exchange rate and interest rate differential relationship is consistent with the possible predominance of financial market disturbances, but the relationship is not stable enough to be statistically significant. In Quasi reduced form real exchange rate models, examined the real versions of alternative rational expectations monetary models of exchange rate determination. In the nominal rate models, the exchange rate depends on fundamentals such as relative national money supplies, real incomes, short-term interest rates, expected inf lation differentials, and cumulated trade balances. The rationale view for this approach is that the nominal exchange rates poor performance is primarily attributable to money demand disturbances, so it can define the close relationship between there real interest differentials and real exchange rates, because, in the class of monetary models considered here, unanticipated money demand disturbances affect both variables proportionately. Feinberg Seth Kaplan, (1992), evaluate and interacts the real exchange rates index expectations is developed and used to explore the role of determination on domestic producer prices. The fact that time path of the exchange rate will directly affect the input costs, and the price of substitutes strongly. To examine the links between both actual and anticipated movements in the dollar and relative domestic producer prices, it chooses to analyze price responses to real exchange rate changes. The effect is dependent on the nature of substitutability between imports and domestic goods. The major finding is that the period of appreciation and depreciation over the past 10 years to inhibit the pass through in to domestic prices. In depreciation the market share to enjoy the continued good times kept prices other than expected. Warren Bailey Peter Chung, (1995), considers the study that the impact of fluctuations on exchange rates and political risk is on the risks premium and is reflected the individual equity returns. It suggests the factors which is common for emerging market equity, currency and debt markets, and make empirical implications to evaluate corporate and portfolio management. If price levels and exchange rate are significantly volatile and cannot be costly hedged, are adversely affected in the real value of the domestic currency. Some evidence that exchange rate fluctuations are a priced factor in cross sections of stock return converted into a common currency. The purpose of this research is to explore the impact of fluctuations on exchange rates and political risk which is consider on stock process of individual companies from the same country. The extent of measurement is that, which exposure factors explain cross sections of returns on individual securities and industry portfolios. The result suggests that the exchange rates and political risks could be significant in equity markets. The result also suggests that the risk premium can be time varying and not be detected by assuming constantly. This research shows the results that it did not find the evidence of the equity market premiums for the currency and political risk. It complements the importance to attach the exchange rates and political risk in the international finance. J.R. Lothian M.P. Taylor, (1996), examines the real exchange rate behavior, and explains the variations in sample of stationary univariate equations in real exchange rates. It investigates the additional insight in the exchange rates behavior that can be gained by considering the floating rate from the perspective of the data. These issues can be best understood on the subject of real exchange rates stability between the currencies of the major industrialized countries. Some of the pre-float studies support the fairly stable exchange rates in the long run. Subsequently, Dornbusch (1976), Frenkel (1981), gave largely as the result of studies published, and reject the hypothesis of random walk behavior of real exchange rates. The PPP shows the empirical movements in real exchange rates were highly persistent and effective; although the PPP is reject the hypothesis of non-stationary behavior of real exchange rates in the long run. The result of this research shows that the longest span of two countries exchange rates are significantly mean reverting. The first model result indicates the 80 percent of the variation in the exchange rates of the history data of two countries. By using of another model, the results explaining the performance of remarkably well in the floating, so that they produce better forecasts of the actual exchange rates. In line with recent studies, it fined that this process of mean reverting is quit slow, with estimated adjustment of data. In the long run the PPP equilibrium is remaining a useful empirical approximation. The deviations of the PPP that observe are consistent with the existence of slowly mean reverting influences, which may be real or monetary regimes. Theory of Optimum Currency Areas: The theory of optimum currency areas, which is usually presented the other name called flexible exchange rate system, but it is proponents as a device of depreciation that take the place of unemployment when the balance of payment is deficit and appreciation when it replace inflation when it is surplus. The problem can be exposed and more revealing by defining a currency area within when exchange rates are fixed. To this three answer can be given; first certain parts of the world are going processes of economic integration, so new experience can be made and at what constitutes the optimum currency area can give the meaning of these experiments. Second those countries that have flexible exchange rates are likely to face problems with the theory of optimum currency areas, so it does not coincide the optimum currency areas with the national currency. Third the idea that illustrates the functions of currencies which have been treated in economic literature, and sometimes neglected in the problems of economic policy. In the currency area, different currency countries including national country currencies interact pace of employment in deficit, because there is the willingness to inflation by the surplus countries. The argument for flexible exchange rate system is based on national currencies, and is valid about mobility of factor, so if it is high in the country and low in the foreign countries, the flexible exchange rates system on home country currencies might work effectively. The concept of optimum currency area has practically applicable only in those areas, where the state has the political organization in the country. The factor mobility is most considered is more relative rather than absolute concept, with both industrial and geographical. It likely to change the alterations with time over time in conditions, where the conditions of political and economic stability. Money is the convenience that restricts the optimum number of currencies, so in terms of this argument the optimum currency area which is composed in number of countries. (Robert A. Mundell, 1961). In another review the author defines the stabilization of capital mobility policy under the exchange rates which is fixed and flexible in the currencies markets; it concerns the theoretical and practical approach of the increased mobility of capital. The assumption is that the interest rate differentials from the level of abroad cannot maintain by the country, if there is the degree of mobility. The securities system are perfect substitutes, because different currencies are involved can be taken in the perfect mobilization, and there exchange rates expected to persist indefinitely, but the forward and spot exchange rate are identical. It identify the monetary and fiscal policy, in which monetary policy assumed the open market purchase of securities while fiscal policy is to form of increase in government spending and financed by an increased in public debt. Its effect the floatin g exchange rate result when monetary policy does not intervene in the exchange market, but it intervene the fixed exchange rates, when the buying and selling of international reserves at the rate of fixed price. The results of this research analyze that, the fixed exchange rates is become a device for the monetary policy and for the levels of reserve, whereas the flexible exchange rates becomes a device for the fiscal policy and for the balance of trade, but policies are unaffected to the level of output and employment. The fixed exchange rates in the perfect mobility will lead to the breakdown as the absence of gold sterilization. The gold sterilization is frustrated the capital outflows and offsetting monetary changes through the exchange rates equalization. The conclude remarks is that, the fixed exchange rates as compared to flexible exchange rates is ineffective under monetary policy, but in fiscal policy both the exchange rates either fixed or flexible are remains weaker for a chieving the level of output. The flexible exchange rates under fiscal policy to play some role in employment policy that can be expected, while monetary policy can have influence on output under fixed exchange rates. In this possibility existing, it wills lesser extent in the future. (R.A. Mundell, 1968). J.H. Makin, (1978), analysis the way to deal the risks involved in foreign exchange currency positions but exchange rates are uncertain. It incorporates the exchange rate changes with the changes in the determination of overall hedging strategy. The purpose is to survey the literature rather to examine the logic on hedge no hedge strategy and to suggest the viewing problem of exchange risk. It identifies the exchange risk diversification in two groups. First diversification investigates the exchange risk with the investor point of view selecting the locations of firms in different countries which denominated in different currencies. The second considers exchange risk with the firm manager point of view to decrease the impact of exchange rate fluctuations. The study concentrates the exchange risk and not overall corporate risk, so the analysis of co

America and Multilateralism: A History

America and Multilateralism: A History Perhaps it is safe to surmise from the very beginning that there does not appear to be a country in the world that is not affected or has not been affected in one way or the other by the United States of America. Short of this, there most certainly does not remain in existence a country, people or society which has no knowledge, however limited, of the United States of America. No single day passes without the American power being addressed or diagnosed in one capacity or the other by the global media. Over time, but in particular, in more recent times, no other country’s political, domestic, economic defence or capabilities and abilities have been more studied or discussed than the extent at which America has been. In actual fact, it is safe to surmise that very few political issues today provoke such strong and diverse responses as the role of the United States of America in its attempt to re-shape world affairs.[1] The recent terrorist attack on America of grave consequence s, its reaction to it and the wars in Afghanistan as well as Iraq have intensified the debate about the nature and prospects of American super power. There remains a school of thought that continues to celebrate the United States’ achievements in proclaiming as well as bringing liberty, democracy and prosperity to every corner of the world. Others are more inclined towards condemnation of America’s pursuit of hegemonic status and its attempt to impose a single economic system and a narrow set of moral belief on other nations around the world. Whichever school of thought one belongs to re America’s performance on the international podium, most have arrived at the conclusion that the history of the twenty-first century will be determined to a large extent by the way American power is used, and by the way in which other major political players on the international front react to it. The nation has often been referred to as an imperial, an empire or hegemony. Most p eople still continue to perceive America as that democratic land of roses where ‘anything can happen’. Some still believe in, especially those outside the shores of the country and straining to one day be admitted into the great country, what they call the ‘American Dream’. It is supposedly a country where ‘anything is possible’. Often times however, America is no longer beheld with rose tinted spectacles. Given its recent history world over, this is hardly a surprise of any significance. The word which best comes to mind when America, that great nation is under discussion as it constantly is for diverse reasons, is hegemony. What, it might be useful to enquire at this juncture, is hegemony? In lay man’s terms, hegemony, succinctly put, is leadership by predominance (some might even say aggression) of smaller and weaker states or nations by naturally bigger nations in an effort to achieve world domination. Does America therefore stand ri ghtly accused of attempting to dominate the world through its conceptualisation of global politics, foreign policies and armed forces, or at least to dominate those nations which are considered smaller and weaker? It is common knowledge that while some countries practice communism or socialism, America was and remains a capitalist country where the motto right after ‘In God We Trust’ is a universally accepted but unspoken ‘survival of the fittest’. In the introductory words of G. John Ikenberry in his book ‘America Unrivalled’, â€Å"The pr-eminence of American power today is unprecedented in modern history. No other great power has enjoyed such formidable advantages in military, economic, technological, cultural or political capabilities. We live in a one-super power world, and there is no serious competition in sight†[2] These words immediately bring to mind perhaps the most controversial wars of all times and America’s gargantuan contribution or one might even dare say blatant single minded orchestration of the same, the Iraqi invasion (and on-going war till date) in 2003. It is worth reminiscing at this juncture how the world watched and waited with bated breath while the United Nations deliberated on whether or not the United States should be granted the authorisation to invade Iraq based on its reports about the so-called axis of evil and the weapons of mass destruction they supposedly had in the making which it further claimed posed un-foretold threats to the international world. It is yet another point in favour of the argument that America is fast becoming or indeed has all but attained the status of an hegemonic state that President George W. Bush announced to the world that regardless of the UN’s decision and that of its Member States, America will forge ahead in war against Ir aq and Afghanistan, alone if they had to. In his exact words, â€Å"†¦when it comes to our security, we really do not need anyone’s permission†[3] It was later argued that it would appear that even the United Nations, a so-called world moderator and international emblem of peace, is nothing but yet another tool in America’s already brimming tool box. Although at the time, this announcement from the Bush Administration sounded as arrogant and ‘above the law’ as it really was, there were many who felt America would be justified in its decision in the wake of the September 11 attack. September 11 2001 (hereafter referred to as 9/11) brought about the turning point in history, international law and the use of force against terrorism. The words of an American man considered very patriotic indeed comes to mind at this controversial stance of George W. Bush re brushing off the world’s opinion and/approval to its use of force in the name of figh ting terrorism. The man, none other than Richard Holbrooke, former United States ambassador to the United Nations, who once stated after careful observation, one should imagine, that the Bush administration threatens to make a â€Å"radical break with 55 years of a bipartisan tradition that sought international agreements and regimes of benefit to us†[4] Many years, loss of lives both civilian and military, reports of horrible treatments meted out to prisoners of war (PWO) by the American soldiers against every rule of Humanitarian Law and the Geneva Convention, America’s refusal to withdraw its troops even after the fall of Saddam Hussein (its greatest enemy) the question on everyone’s lips is whether the war was indeed for all the altruistic reasons quoted by America in its rather fabricated reports or for more reasons closer to home. The question can even be posed all the way back to Operation Desert Storm in the same Iraq in 1993. Did America invade Iraq on both occasions for economic gain and ultimately to place itself as the world’s super power. Although it appears now to the world that the Bush administration is the one responsible for dramatically drawing America away from multilateralism, a look back into the Clinton administration will confirm that this is not remotely true. Under the Clinton administration, America neither waited for the United Nation’s approval/authorisation before deploying the North Atlantic Treaty Operation (NATO) to Serbia in 1999 nor prior to its bomb attack on Iraq in 1998. There were also other Conventions, Acts and Treaties America rather conspicuously refrained from signing or ratifying such as the banning of further use of Land Mines (the Ottawa Convention of 1997). The difference perhaps would be where the Clinton administration adopted diplomacy in its delivery of such unilateral decisions; the Bush administration simply forges ahead with no regard for the world’s opinion, appro val or in most cases disapproval. In the era immediately after the World War (II), America’s strength was not only viewed during the war with the deployment of its armed forces, which later formed an alliance with the United Kingdom amongst others (the allied forces) but also after the war in its attempt to rebuild Germany as well as other war torn countries in the war aftermath. In this, America had strategised and was apparently successful in ensuring that the world did not revert to its closed regional dealings of the 1930s prior to the war. The founding of the United Nations on 24 October 1945 also saw to it that the beginning of what is now known as globalisation was established. A post war era of multilateral character and significance was thus built around economic and security agreements such as the Bretton Woods Agreement on monetary as well as trade relations among nations. The American-led NATO security pact followed much later. This international order which came into existence after the war (World War II) was effectively one which was multilateral in character. A more open system of trade and investments began to emerge, largely encouraged by America. Economic and security matters as well as political relations became indistinguishable and indivisible among nations in what is best described as an open world market or globalisation. This is evident in the General Agreement on Tariffs and Trade (GATT) as well as the Bretton Woods agreement earlier mentioned. An alliance tie emerged between the United States and the Great Britain in particular and the European continent in general in a scenario one could simply put in lay man’s terms ‘rub my back and I will rub yours’. America’s economic as well as security assistance to the Asian region is also worth mentioning. America ensured and continues so to do, that weaker and smaller states are afforded security assistance, protection and granted access to its markets, technology and country in general. In th e wake of America’s Green Card Lottery scheme, the support and admiration of other smaller states for which the scheme was intended and who continues to benefit from the same was firmly secured. In a similar vein after the world war, citizens of many nations flocked in their thousands to America from world over and started life over again after the war. In what is not unlike the stone age ‘trade by barter’ arrangement, the participating states in turn continue to ensure that political stability is maintained in their relationship with the United States, making available to America their diplomatic, economic and logistical support in return. For instance, America has training grounds in Saudi Arabia and Kuwait, perhaps as a lasting result of Operation Desert Storm. Going back in history however, it remains indelible that there were 5 world super powers including America itself. How then can Ikenberry infer that America has no competition in sight in its steady climb to the top in the international hemisphere? Who were the other four super powers and what became of them? The five major contenders when the United Nations was founded in 1945 were Russia, Great Britain, China, and France. It is accurate to say that the cold war put paid to Russia’s contention with America. The Great Britain, as exhibited more recently under the Tony Blair administration is more or less a lap-dog to American’s policies and remains a rather very friendly ally than a potential contender. Yet it will be nothing short of fallacious argument to say that America has no contender or is without competition in one form or the other. Worth remembering as well is Germany and France’s initial reluctance as well as refusal to throw their weight behind the Ir aqi invasion in 2003. America’s hegemonic state is therefore not without challenges as well as challengers, it is however the multifaceted character of America’s power that makes the country so far reaching, daunting, provocative and formidable to less equipped and smaller countries. The collapse of the Soviet Union in the Cold War saw an acute decline in rival ideologies and even tighter alliances formed between the United States and other regions. Following the Cold War, America continued to grow from strength to strength. In the 1990s its economy was commendably and successfully restructured. Also growing in significant progression alongside its economy is its armed forces and global recognition as a state to reckon with. By the turn of the millennium, America’s economic and military growth had wedged a seemingly insurmountable gulf between itself and other major players in world politics. While the late 90s saw Japan’s economy grow by 9 per cent, the European Union altogether by 15 per cent, American economy grew by a significant 27 per cent, nearly doubling and tripling that of the other regions.[5] This did not go unnoticed by the rest of the world. In fact literally doffing his hat to the United States in a speech in Paris (1999), the French Foreign Minister, Hubert Vedrine, observed that the growth witnessed by the world in America â€Å"is not comparable in terms of power and influence to anything known in modern history†[6] America’s devotion to its armed forces can by no means be ignored. America boasts an army that is better equipped and out numbers the armed troops of well over 14 countries put together. There are training grounds for the United States army in well over 40 locations world wide. This automatically means that when another weaker or slightly less advantageous state envisages itself in trouble, the first point of call for protection and assistance, when and if necessary is the United States of America. In its usual confidential, bordering on arrogant manner America’s National Security Strategy declared to the world that their forces will be strong enough to dissuade potential adversaries/would-be challengers from pursuing a military build-up in hopes of surpassing, or even remotely equalling, the power of the United States.[7] It is not impossible or even unthinkable for America to utilise its military capacity to impose its policies on other states in different regions of the world. It has been observed already that America spends on its armed forces more than the next fourteen countries combined and that the U.S. military expenditures will shortly be equal to the rest of the world combined.[8] Another scholar of repute, Paul Kennedy, also surmised that it is already the case that all the other navies in the world combined could not dent American maritime supremacy.[9] Still on the issue of security, expressing his own opinion and an opinion apparently shared by many others world over, Barry Possen has suggested that the United States’ command of the sea, space, and air forces is the ‘key military enabler of the U.S. global power position’.[10] Assuming its economic growth remains as healthy as it has been since the 90s, the concentration of world military power may continue for several decades yet. Even at the current level of U.S. capabilities, it is the general view that ‘the United States can shoulder the burden of maint aining global security without much help from Europe’ or the rest of the world for that matter.[11] It begins to appear obvious that perhaps America’s initial support for multilateralism in international trade and globalisation was borne of a grander strategic move to acquire and retain more power while legitimately promoting international reliance of one state on the other, one region on others for support, growth and assistance. A quick glimpse at major historical turning points such as 1919, the end of World War II in 1945 and the period immediately after the Cold War all but confirms this logic. It would appear that America promoted multilateralism in such a strategic way so as to signal restraint and commitment from other states.[12] This precipitated the acquisition of support, if not actual trust, acquiescence and cooperation of other weaker states. But surely when one country is placed so much higher than others in the case of all animals are equal but some more than others, there naturally arises the problem of balance of power or even equality before the law. What the majority of member states may attempt with the United Nations and come out facing adverse repercussions for is the same thing the United States will not only attempt but carry out and come out smelling of roses. For the sake of this discussion, should one be given to a flight of fancy however fleetingly and imagine or a moment that a member state such as Ghana or Nigeria threatens the use of force against Cameroon and declares to the world that the same will be effected whether or not the United Nations and indeed the world approves of its actions. At the very least, economic sanctions will immediately be placed on such a country. However in the name and under the umbrella of 9/11 it would appear that America is permitted to do and undo whatever catches its fancy and of course promotes its economic as well as military growth. How else can one begin to explain the issue of thousands held prisoner at the US military operated prison and indeed a recreation of Camp Delta, Guantanamo Bay, for years with neither charges nor trial in the name of fighting terrorism? America claims not to have jurisdiction in Cuba to try these prisoners yet it has the power and the authority to imprison them in Guantanamo Bay. What, one is right to ask, happened to the universal (at least in democratic states) ‘writ of habeas corpus’? Another example of America’s marked shift from multilateralism to unilateralism and establishing itself as a super power above the rest of the world is again glimpsed shortly after the controversial invasion of Iraq in 2003, when America was quick to submit allegations against North Korea as well as Iran for also becoming threats to the international community as they were manufacturing nuclear weapons. In an ironical twist however, in 1998, Japan, perhaps once one of America’s closest allies, was reportedly furious with America when its officials unilaterally decided that funding for North Korean Nuclear reactors was to con tinue despite Japan’s complaints that North Korea was firing missile over its territory.[13] What then can possibly put an end to America’s domination of the international stage and its rise towards a super power of hegemonic characteristics? It has been established that the two most important factors in the growth of any nation; its economy and defence, remain the two areas where America continues to excel and prosper rendering it even more of a force to reckon with by other nations of the world. Is it then any wonder that many are of the school of thought that it is only a matter of time before America seeks to completely dominate the world and by so doing, simply crush out weaker states of the world. It is enough to alert the world that more than any other administration before it, the Bush administration is significantly departing from materialism especially on agreements dealing with arms control and proliferation. Multilateralism, as Ikenberry’s book posed the debate, does indeed seem to be on the decline in America’s policy and political stance. I t has become to America a selective game where multilateralism is embraced when it adds to the muscles in its already bulky biceps and unilateralism at every other turn. As America continues to systematically depart from multilateralism and promote more unilateralism in its foreign policies and decisions on security affairs affecting not only its boundaries (assuming such a word as ‘boundary’ exists in the American dictionary) but also spread ashore to other nations of the world, the world may very well be moving rather rapidly towards the final unravelling of America as a hegemonic nation. What and who in the world can then possibly challenge America’s hegemony? Surely it would take a large scale war or a crucial global economic crisis to challenge or even come close to threatening America’s hegemony. While this might be very well put and even precise in theory, surely either option will definitely have grave repercussions on the international community. However, Ikenberry argues in his book, ‘America Unrivalled’, that there are limits to the United States’ hegemony such as it stands at the moment. He is of the opinion that a complete hegemonic order would require not just preponderant capabilities but also some significant degree of acquiescence on the part of other states, especially the other major players in world politics for the maintenance of such order. Following the Cold war, America acquired the support and cooperation of one of the major players in that region, Japan. Japan was once America’s closest ally as a result of this, however even Japan is becoming resentful, as presumably are the rest of the world, at America’s increased unilateralism (as in the North Korean case mentioned above) and the selective choice of multilateralism only when it favours the nation in one form of economic or security purpose or the other. It is therefore not impossible that other major players in the world, on examining their alternatives on how to best rid America of its hegemonic status and by so doing release the unsuspecting world from American domination, may very well challenge its hegemonic position. Capitalising on the regional and international relationships once promoted by America, the other major super powers in the Asian Region and the European Union could orchestrate an over throw of America’s position as an hegemonic state or at the very least challenge the same. Not ignoring the power and importance of smaller or weaker states however, they would quite naturally also have to be involved. This however would be an all scale war, the magnitude, repercussion and significance of which will tremble the world perhaps more than every previous wars put together! Any would-be hegemonic challenger would most naturally have already arrived at the very same conclusion. Apart from the fact that every single one of these would-be challengers rely on the United States for one as pect of its sustenance or the other, it would take a lot of consideration, meetings, strategising and concrete persuasion to convince every member state of the necessity of such a global war. With its present and ever growing resources both at home and abroad, it is therefore only a matter of time before America, at whom the war is intended, becomes aware of the plans and builds up enough or adequate defence against the same. While it is not impossible that several nations of the world may come together and challenge America’s build up to hegemony, to say that the world may never recover from such a large scale war may perhaps be the understatement of the existence of mankind. In a brief state of fantasy, were one to assume that this large scale war does take place and does remove America from the pinnacle of power it currently occupies, there is no telling how many decades or even centuries it would take to rebuild a world of international trade and globalisation. Another da nger in that is another country seizing the opportunity and rising very rapidly to the throne of hegemony, in this instance however, a country not so democratically inclined as America, for instance, China. The world as we know it now may cease to exist as a result of such a war. It is now 2008 yet traces of the Second World War still remain evident in some areas in the Eastern part of Germany as one imagines it does in other affected parts of the world. If the argument here is then that a full blown war against America’s hegemony may do the world greater harm than good, what then can possibly stop America’s climb to the top of the world? As mentioned earlier, the strength of any nation lies in its economic as well as military growth. One, quite naturally, is not devoid of the other however as training camps, gears and facilities will be difficult to procure without a booming economy. Should the world then experience a global economic crisis, the like of which it is yet to ever experience, perhaps this will in a way also bring America to the same level as other countries or at least less dominant? In this present day, at least the European Union and America are experiencing an economic crisis that has been likened to the worst in many decades till date. The Great Britain’s Royal Bank of Scotland recently announced that the country is indeed in recession. China and Japan have also reported major decline in sales and poor performances on their Wall Street equivalent. Japan has actually announced to the world, like Great Britain, that it is indeed in the middle of a torrid recession. While this economic crisis may very well be unpleasant and indeed wrecking a lot of harm on the economy of the countries involved, it will take much more than this to cripple America or to reduce its hegemonic status. Even at this point in time, the US Dollar continues to rise against the British Pound and the Euro. Should the world experience an economic crisis of such negative significance that all the major states as well as even the ones considered smaller and weaker are effectively affected, America’s hegemony, in my humble opinion, will most certainly be thoroughly challenged. This will be brought about by the fact that the international community in a bid to survive and revert to some semblance of normality will be forced to depend one on the other for that means to survival, America included. Such a scenario will almost take the world back in history to the early days when the advantages of globalisation and inter dependence of nations on one another was first discovered. Such an economic crisis w ill render it almost impossible for states to continue to concentrate on military training and equipments. One should imagine that nations will be more concerned with the immediate welfare of their people such as housing, medical care and social services as undoubtedly unemployment will rise astronomically in the face of an economic crisis of any significant magnitude. From everything hereinabove appearing and the examination of different (learned) opinions as well as scenarios, it is therefore perhaps appropriate to conclude by agreeing with the debate that should a full blown war orchestrated by would-be challengers of America’s hegemonic state fail, surely an economic crisis of significant global scale will not only challenge but also probably, however temporarily, bring an end to America’s hegemony. America will be forced to revert to the multilateralism way of international politics and to abandon unilateralism in a bid to promote globalisation and a closer knit international community. Bibliography John, G. Ikenberry, ‘America Unrivalled: The Future of the Balance of Power’ (Cornell University Press, 2002) John, Ikenberry, ‘Is American Multilateralism in Decline?’ Perspectives on Politics 1:3 (2003) ‘Hegemony or Empire’ The Redefinition of US Power under George W. Bush, Edited by Charles-Philippe David and David Grondin (2006) Richard Little, Michael Smith, ‘Perspectives on World Politics’ Ikenberry, G. John, ‘Liberalism and Empire: Logics of Order In The American Unipolar Age’, Review of International Studies (2004) Stephen M. Walt, ‘Keeping the World â€Å"Off-Balance†: Self-Restraint and U.S. Foreign Policy’, in Ikenberry, America Unrivalled, pp. 121-154. Charles A. Kupchan, ‘Hollow Hegemony or Stable Multipolarity?’, in G. John Ikenberry (ed.), America Unrivalled: The Future of the Balance of Power (Ithaca, NY: Cornell University Press, 2002), p. 72. According to Kupchan, the European Union is emerging as the main competitor of the United States in a future multipolar international system. Whither American Power? David Held and Mathias Koenig-Archibugi Published in: American Power in the Twentieth-First Century, edited by David Held and Mathias Koenig-Archibugi, Cambridge: Polity Press, 2004. Kennedy, Paul, ‘The Rise and Fall of the Great Powers’ 1987 Footnotes [1] David Held and Mathias Koenig-Archibugi, ‘Whither American Power?’ In American Power in the Twentieth-First Century [2] G. John, Ikenberry ‘America Unrivalled’ Pp 1 [3] Quoted in Balz 2003, A1 [4] Purdum 2002., 1 [5] Ikenberry [6] Quoted in Craig R. Whitney, ‘NATO at 50’ With Nations at Odds, Is It A Misalliance? New York Times 2, 1999 [7] President of the United States, The National Security Strategy of the United States of America (Washington D.C.: White House, September 2002), p. 30. [8] G. John Ikenberry [9] Paul Kennedy, ‘The Greatest Superpower Ever’, New Perspectives Quarterly, 19 (2002). [10] Barry R. Posen, ‘Command of the Commons: The Military Foundation of U.S. Hegemony’, International Security, 28 (2003), pp. 5-46, p. 8. [11] On the durability of U.S. supremacy see William C. Wohlforth, ‘The Stability of a Unipolar World’, International Security, 24 (1999), pp. 5–41. [12] Argument was developed by Ikenberry 2001 [13] Marshall and Mann, ‘Goodwill Towards the United States is Dwindling Globally’

The Importance of the Sonnet in William Shakespeares Romeo and Juliet

Although Shakespeare’s Romeo and Juliet is a tragedy of two young lovers caught in the whirlpool of their own youthful passion, it is also a tragedy of two young people at the mercy of a feud not of their making and of fateful events over which they have no control. Regardless of our individual response to this play, we have a common response of deep sadness over the senseless deaths of the two young lovers. Regardless of the cause of the tragic events, we are on their side. Â   There are several ways to think about Romeo and Juliet, but recent discussions of the play look at the form and language of love that Shakespeare uses and how his use of one particular form, the sonnet, enhances our sense of the play. By directing our attention to the sonnet qualities in Romeo and Juliet, we are able to discern a growing maturity in these two characters, one which, especially in the case of Juliet, belies their untried youth. This article will examine how the sonnet conventions found in Romeo and Juliet reflect the play's stance on young love as well as how Juliet's resistance to the sonnet reveals a character that allows her to endure the desertion of virtually everyone around her. Â   The sonnet is a fourteen-line love poem. Perfected by the Italian Petrarch in the fifteenth century, the form followed certain conventions. The subject matter was that of unrequited love. The sonneteer would write a cycle of sonnets dedicated to a woman, his "sonnet lady," whom he knew only from afar, who was unavailable, whose very presence changed one's earthly existence into heaven. The fourteen-line sequence was often marked by a reversal, a "turn" between the first eight and the last six lines. Frequently, the turn would move from the ph... ...m to abandon Juliet in the tomb of her dead ancestors with the body of Romeo. Throughout the chaos that occurs when the tragedy in the tomb is discovered by the outside world, Juliet remains firm and resolute, a stark contrast to the confusion that even spills into the streets of Verona: "For I will not away" (5.3.160). Preferring death to the hostile world around her, she stabs herself with Romeo's dagger. Â   Although we see the chastened adults receive their greatest punishment, the deaths of their children, it seems far too great a price to pay for the settling of a feud. Our hearts remain with Romeo and Juliet, who found passion in love rather than in hatred and who matured far beyond their adult role models. Â   "This thou perceiv'st, which makes thy love more strong To love that well, which thou must leave ere long." -- Sonnet 73 Â   Â  

The Tragedy Of Edgar Allan Poe Essay -- essays research papers

Edgar Allan Poe is one of the leading figures of American literature. He is known as a poet and a critic, but is most famous as the first master of the short story form, especially tales of the mysterious and gruesome. In Poe’s poems, like his tales, his characters are tortured by nameless fears and longings. Today Poe is acclaimed as one of America’s greatest writers, but in his own unhappy lifetime he knew little but failure. Poe had an unstable family life. The insecure place he held at home interfered with his emotional stability. He was born as the son of actors. â€Å"The two were not notably talented; they played minor roles in third-rate theatrical companies.† (Buranalli 7) Between them they barely managed to make a living. Poe was the second of their three children. About the time the third child was born, the father died, or disappeared, and Mrs. Poe went to Richmond, Virginia with the two youngest children. The oldest child, William Henry, had been left in the care of his grandparents in Baltimore shortly after his birth. Mrs. Poe was overtaken by a fatal illness (tuberculosis). Devastated by the disease and worn out with the struggle to support her children, she died. Edgar, two years old, and the infant, Rosaline, were orphaned. Poe was taken into the home of John Allan, a wealthy merchant. His wife, Frances Allan, had no children and wanted to adopt Poe as her son. Mr. Allan was unwilling to commit himself to a step of such permanence. â€Å"The acting profession was despised at the time and was even considered immoral.† (Meyers 11) Mr. Allan thought the little son of actor parents was a questionable person to inherit his name and the fortune he was busy accumulating. He was however, willing to support the child, to please his wife. Family was of the greatest importance in Richmond, the place where Poe spent most of his boyhood. Poe felt the difference between the children at school and himself. He was not close to his (foster) father, like other boys were. Mr. Allan’s unwillingness to adopt him bothered him greatly. It hurt him that he was not wanted enough by his father to legally be his son. He acted out in fits of temper and rebellion. His family did not understand his reasoning for being so upset. Mr. Allan was a hardheaded businessman with no patience for Poe’s â€Å"reasonless† actions. â€Å"He handled the situation by reminding the boy of his ‘disreput... ...ing the winter of 1846-47, when the couple had little food of fuel, Virginia reached the end of life. After Virginia’s death Poe became even more depressed and temperamental. He slept with many women in a vain attempt to find comfort for the loss of his wife. In 1849 he re-met his high school sweetheart, Elmira. They became engaged. After making wedding plans, he set out for New York City from Richmond, but disappeared in Baltimore. He was found five days after he disappeared very near death. He died without regaining full consciousness, four days later on October 7, 1849, ten days before the date he had set for his wedding.   Ã‚  Ã‚  Ã‚  Ã‚  Poe’s life was indeed marked by misery and tragedy. He was abandon by his father, lived in poverty as a writer, and suffered the loss of many loved ones. On the other hand, maybe it was his dreary life that caused him to escape into the imaginative fantasy world that became his writer’s playground. Looking at it from that perspective, perhaps his unfortunate personal life was the springboard for his success as a writer. Poe did, no matter, have great talent and will forever be remembered for his brilliance in American literature.