L16_FXI - Today Present international monetary system Fixed...

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1 Lecture 16 Foreign exchange market intervention 1 Today Present international monetary system Fixed exchange rates Central bank interventions Unsterilized and sterilized intervention Floating exchange rate Coordination failure The policy trilemma Empirical studies on exchange rate regimes Lecture 16 Foreign exchange market intervention 2 Present Exchange Rate Regimes, 2002 floating or flexible exchange rate regime (40) Don t intervene to influence market value of S United States, UK, Canada, Japan, Korea, etc. managed floating regime (42) May intervene to influence S in some way Russia, Thailand, Iraq, Singapore, etc
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2 Lecture 16 Foreign exchange market intervention 3 Present Exchange Rate Regimes, 2002 crawling bands (6) Intervene to maintain S in a band around a central rate, and these bands were periodically adjusted Israel, Romania, Venezuela, etc. crawling pegs (4) S was fixed in value to another currency or to a basket , but adjusted periodically by small amounts Bolivia, Costa Rica, etc. fixed exchange rates or fixed pegs (44) Adopt a policy goal of keeping S at a fixed value in terms of another currency or a basket China, Malaysia, Fiji, etc. Lecture 16 Foreign exchange market intervention 4 Present Exchange Rate Regimes, 2002 currency board (7) Fully back up the domestic currency with reserves of foreign currency to which domestic currency is pegged Hong Kong SAR, Bulgaria, Brunei, etc no independent currency whatsoever (40) Euro area, Panama, Ecuador, etc.
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3 Lecture 16 Foreign exchange market intervention 5 Fixed Exchange Rate Regime So far, our discussion has been focused on the floating exchange rate regime and how we got there. Today, briefly discuss fixed exchange rate regime. Still very important today Central banks need to continuously intervene in the markets to keep S fixed. Understand restrictions on domestic policy. Lecture 16 Foreign exchange market intervention 6 The Basics of Central Banking Central bank balance sheet assets liabilities Foreign assets Deposit held by private banks foreign currency foreign deposits foreign bonds Domestic assets Currency in circulation
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4 Lecture 16 Foreign exchange market intervention 7 The Basics of Central Banking A central bank controls the supply of money through open market operations: exchange assets for currency The Fed sells US T-bills: reduces M The Fed sells its foreign currency. By selling yen for dollar, for example, also reduces M. Any central bank purchase (sale) of assets results in an increase (decrease) in domestic money supply. Lecture 16 Foreign exchange market intervention
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L16_FXI - Today Present international monetary system Fixed...

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