Spectrum of Exchange Rate Arrangements … From Fixed to Flex Currency Union: EMU/USA/CFA Dollarization: Ecuador/Panama Currency Board: Argentina, 1990s Commodity Standard: Gold Standard Adjustable Peg: Bretton Woods Target Zone: ECU – ERM Crawling Peg: Mexico, early 1990s Dual Exchange Rate Systems : : Dirty Float/Managed Float Clean Float

Review: Monetary Union Benefits and Costs Benefits Reduced Transaction Costs Reduced Uncertainty/Currency Risk –Long – term capital flows –Hot money … extinguished DISCIPLINE –Monetary Policy/Fiscal Stance –Wages and Prices

Review: Monetary Union Benefits and Costs Costs DISCIPLINE –Loss of discretion –Asymmetric shocks …different strokes Alternative Flexibility –Flexible wages –Labor mobility –Capital mobility Division of Seignorage

Fixed Exchange Rates in History: Some Terms The Gold Standard –Par Value –Gold Points –“Bank Rate” Bretton Woods … IMF –Key Currency –Vehicle Currency –Fundamental Disequilibrium –Standard Drawing Rights (SDR) –Exchange Stabilization Fund –Devaluation / Revaluation

Recent Currency Crises Speculative Attacks, Contagion European Monetary System, Sept 1992 –UK –Sweden –Italy Mexico Tequila Crisis, Dec – 1995 East Asia, –Thai bhat –Indonesian rupiah –Malaysian ringgit –Philippine peso –Korean won –Hong Kong/Singapore/Taiwan dollars Russia, 1998 Brazil, 1998 Argentina, 2001 Prescription: Tobin Tax  Repel hot money