Exchange Rate Arrangements: Various Options

Slides:



Advertisements
Similar presentations
At the end of the lesson u should be able to: assess the advantages and disadvantages of floating ER system vis-à-vis the fixed ER system.
Advertisements

Chapter 19 Macroeconomic Policy and Coordination Under Floating Exchange Rates Prepared by Iordanis Petsas To Accompany International Economics: Theory.
First edition Global Economic Issues and Policies PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western/Thomson Learning. All rights reserved.
The Case for Floating Exchange Rates
Slide 19-1Copyright © 2003 Pearson Education, Inc. The Case for Floating Exchange Rates –Monetary policy autonomy –Allow each country to choose its own.
1 International Finance Chapter 33 © 2006 Thomson/South-Western.
MIM 513 Pacific Rim Economies Class Three – International Monetary Systems, Emerging Markets, & Integration.
Economics – A Course Companion Blink & Dorton, P
EXCHANGE RATES.
M ONETARY S YSTEMS Lecture 6 Vallyon Andrea 1. A GENDA 1. Presentation about the money history 2. Exchange rate systems 3. History of International Monetary.
EXCHANGE RATES AND THE MARKET FOR FOREIGN EXCHANGE Lecture 05 /06.
 The European Central Bank is responsible for formulating and implementing monetary policy for the Eurozone.
International Finance Lecture 3 EXCHANGE RATE AND BALANCE OF PAYMENTS.
1 Chapter 9 part 2 International Finance These slides supplement the textbook, but should not replace reading the textbook.
Macroeconomic Policy and Coordination Under Floating Exchange Rates
Copyright © 2006 Pearson Addison-Wesley. All rights reserved Introduction The Bretton Woods system collapsed in 1973 because central banks were unwilling.
Exchange Rate System Flexible Exchange Rate System
Exchange Rates Countries choose their exch. rate system:
Exchange Rate Demonstration. Exchange Rate The price of one country’s currency measured in terms of another country’s currency ex. $/Pound or Pound/$
Determination of Exchange Rates  Jashim Uddin Senior Lecturer, East West University, Bangladesh.
Exchange Rate Regimes Lecture 2 IME LIUC 2010.
EXCHANGE RATE REGIMES Julie Harris. Fixed vs. Floating  The exchange rate fluctuates in a narrow range (or not at all) against a base currency over a.
International Finance FINA 5331 Lecture 5 History of Monetary Institutions Read: Chapters 2 & 3 Aaron Smallwood Ph.D.
Fixed and Floating Exchange Rates
Balance of Payments and Foreign Exchange
Distinguished Lecture on Economics in Government Exchange rate Regimes: is the Bipolar View Correct? Stanley Fischer Ahmad Bash P13-18.
Copyright  2006 McGraw-Hill Australia Pty Ltd. PPTs t/a International Trade and Investment: An Asia-Pacific Perspective 2e by Gionea. Slides prepared.
1 International Finance Chapter 19 The International Monetary System Under Fixed Exchange rates.
International Monetary System
© The McGraw-Hill Companies, 2002 Chapter 34 Exchange rate regimes David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 7th Edition, McGraw-Hill,
Copyright © 2006 Pearson Addison-Wesley. All rights reserved Introduction We saw how a single country can use monetary, fiscal, and exchange rate.
Exchange rate regimes Many countries have some control on the exchange rate Completely flexible exchange rates would means that the rate is left to the.
 Foreign Exchange. Basics of Forex  Marketplace where currencies are exchanged  Critical for conducting foreign business  Largest financial market.
1 International Macroeconomics Chapter 8 International Monetary System Fixed vs. Floating.
International Monetary System
© The McGraw-Hill Companies, 2008 Chapter 34 Exchange rate regimes David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill,
© 2012 Pearson Education, Inc. All rights reserved Alternative Exchange Rate Arrangements and Currency Risk Exchange rate systems around the world.
4. International Monetary System and Foreign Exchange Rate Policy International Financial Services 1 Karel Bruna.
Special Topics in Economics Econ. 491 Chapter 5: Exchange Rate Policy.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
EXCHANGE RATE DETERMINATION
© The McGraw-Hill Companies, 2005 Chapter 34 Exchange rate regimes David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill,
With floating exchange rates, changes in market demand and market supply of a currency cause a change in value. In the diagram below we see the effects.
MLI28C060 - Corporate Finance Seminar 1. Question 1. What are the eight contemporary currency regimes as defined by the IMF? Provide examples where possible.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Chapter 5: Exchange Rate Systems Power Points created by: Joseph F. Greco Ph. D.,
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
McGraw-Hill/Irwin Copyright  2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 20: Government Policies toward the Foreign Exchange.
Starter: Recap… Macro effects of a currency depreciation
Government Influence On Exchange Rates
International Economics By Robert J. Carbaugh 8th Edition
International Economics By Robert J. Carbaugh 7th Edition
Chapter 29 Exchange rate regimes
Starter: Recap… Macro effects of a currency depreciation
International Economics By Robert J. Carbaugh 9th Edition
Monetary System This is a test.
Chapter 19 Macroeconomic Policy and Coordination under Floating Exchange Rates.
Starter: Recap… Macro effects of a currency depreciation
Introduction The Bretton Woods system collapsed in 1973 because central banks were unwilling to continue to buy over-valued dollar assets and to sell.
Part II Exchange Rate Behavior
International Economics
Module Exchange Rate Policy
Module Exchange Rates and Macroeconomic Policy
Exchange Rates and Macroeconomic Policy
Part II Exchange Rate Behavior
Chapter 10.
Exchange Rate Policy 02/28/17 AP Macro Mr. Warner.
EXCHANGE RATE DETERMINATION Arun Mishra
Lecture 6 The Global Monetary System
Presentation transcript:

Exchange Rate Arrangements: Various Options Choice before an authority Fixed Exchange Rate System Floating Exchange Rate System

Exchange Rate Arrangements: Various Options THE CASE FOR FLOATING EXCHANGE RATES 1. Monetary policy autonomy. If central banks were no longer obliged to intervene in currency markets to fix exchange rates, authorities would be able to use monetary policy to reach internal and external balance. Further, no country would be forced to import inflation (or deflation) from abroad.

Exchange Rate Arrangements: Various Options 2. Symmetry. Under a system of floating rates the inherent asymmetries of Bretton Woods would disappear and the United States would no longer be able to set world monetary condition all by itself. At the same time, the United States would have the same opportunity as other countries to influence its exchange rate against foreign currencies.

Exchange Rate Arrangements: Various Options 3. Exchange rates as automatic stabilizers. Even in the absence of an active monetary policy, the swift adjustment of market-determined exchange rates would help countries maintain internal and external balance in the face of changes in aggregate demand. The long and agonizing period of speculation preceding exchange rate realignments under the Bretton Woods rules would not occur under floating.

Exchange Rate Arrangements: Various Options THE CASE AGAINST FLOATING EXCHANGE RATES 1. Discipline. Central banks freed from the obligation to fix their exchange rates might embark on inflationary policies. In other words, the "discipline" imposed on individual countries by a fixed rate would be lost.

Exchange Rate Arrangements: Various Options 2. Destabilizing speculation and money market disturbances. Speculation on changes in exchange rates could lead to instability in foreign exchange markets, and this instability, in turn, might have negative effects on countries' internal and external balances. Further, disturbances to the home money market could be more disruptive under floating than under a fixed rate.

Exchange Rate Arrangements: Various Options 3. Injury to international trade and investment. Floating rates would make relative international prices more unpredictable and thus injure international trade and investment.

Exchange Rate Arrangements: Various Options 4. Uncoordinated economic policies. If the Bretton Woods rules on exchange rate adjustment were abandoned, the door would be opened to competitive currency practices harmful to the world economy. As happened during the interwar years, countries might adopt policies without considering their possible beggar-thy-neighbor aspects. All countries would suffer as a result.

Exchange Rate Arrangements: Various Options 5. The illusion of greater autonomy. Floating exchange rates would not really give countries more policy autonomy. Changes in exchange rates would have such pervasive macroeconomic effects that central banks would feel compelled to intervene heavily in foreign exchange markets even without a formal commitment to peg. Thus, floating would increase the uncertainty in the economy without really giving macroeconomic policy greater freedom.

Exchange Rate Arrangements: Various Options Various Alternatives Available Under Floating Exchange Rate System Free Float Dirty Float Floating Within A Band Sliding Band Crawling Band Crawling Peg Fixed but Adjustable Currency Board Dollarization

Exchange Rate Arrangements: Various Options Free Float Value of foreign exchange freely determined in the market. Actual and expected changes in demand/ supply of assets and goods reflected in exchange rate changes

Exchange Rate Arrangements: Various Options Dirty Float Sporadic central bank interventions in foreign exchange markets. Modes and frequency of intervention vary as do the objectives guiding the interventions. Active interventions results in changes in international reserves. Indirect interventions (through changes in interest rates, liquidity and other financial instruments) does not result in changes in reserves

Exchange Rate Arrangements: Various Options Floating Within A Band The exchange rate is allowed to fluctuate within a band. The center of the band is a fixed rate, either in terms of one currency or of a basket of currencies. The width of the band varies. Some band systems are the result of cooperative arrangements, other are unilateral Example: (The Vietnam government announced a raft of plans, including widening the currency trading band, to help counter the nation’s fastest inflation in more than 12 years. It plans to widen the currency’s trading band against the dollar to 2%, up from the current 0.75%. (7 March 2008))

Exchange Rate Arrangements: Various Options Sliding Band There is no commitment by the authorities to maintain the central parity "indefinitely" . Instead it is clear at the outset that the central parity will be adjusted periodically (e.g. due to competitiveness considerations) The system is an adaptation of the band regime to the case of high inflation economies.

Exchange Rate Arrangements: Various Options Crawling Band A band system whereby the central parity crawls overtime. Different rules can be used to determine the rate of crawl. The two most common are backward looking crawl (e.g. based on past inflation differential ) and forward looking crawl (e.g. based on the expected or target, rate of inflation)

Exchange Rate Arrangements: Various Options Crawling Peg The normal exchange rate is adjusted periodically according to a set of indicator (usually lagged inflation differentials) and is not allowed the alternate beyond a narrow range (say two percent) One variant of the system consists of adjusting the nominal rate by a pre-announced rate set deliberately below ongoing inflation.

Exchange Rate Arrangements: Various Options Fixed but Adjustable The regime epitomized by the Bretton Woods System. The exchange rate is fixed but the central bank is not obliged to maintain the parity indefinitely. No tight constraints are imposed on the monetary and fiscal authorities regarding policies that are inconsistent with preserving the parity. Adjustments of the parity (devaluation) are a powerful policy instrument

Exchange Rate Arrangements: Various Options Currency Board Fixed exchange rate system with institutional (legal and even constitutional) constraints on monetary policy and no scope for altering the parity. The monetary authority can issue domestic money only when it is fully backed by inflows of foreign exchange

Exchange Rate Arrangements: Various Options Dollarization Generic name given to and extreme form of a currency board system where the country gives up completely its monetary autonomy by adopting another countries currency