Chapter 14 Fixed Exchange Rate Systems

Chapter 14 Fixed Exchange Rate Systems - Chapter 14 Fixed...

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Chapter 14 Fixed Exchange Rate Systems © Leddin & Walsh 2013
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Road map: 1. How a fixed exchange rate system works 2. Why fixed exchange rate systems do not endure 3. Which exchange rate regime is best? 4. Historical fixed exchange rate systems 5. The currency crisis of 1992-93 6. The Irish pound and the crisis of 1992-93 © Leddin & Walsh 2013
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1. How a Fixed Exchange Rate System Works Objective is to stabilise exchange rates. Reduce e uncertainty and thereby encourage international trade. Key point is that for the system to work, there must be similar inflation, interest rates and growth rates. In turn, this requires policy co-ordination: (fiscal, monetary and incomes policies). © Leddin & Walsh 2013
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Exchange rates are held in a “band”. 1. Depreciation (against $): ECB creates artificial demand for Euro. 2. Appreciation (against $): ECB creates artificial supply of Euro. •. 1. above leads to a fall in the external reserves. •. As the Central Bank runs out of external reserves, it may be forced to engage in foreign borrowing or bring in IMF. © Leddin & Walsh 2013
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© Leddin & Walsh 2013
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2. Why Fixed Exchange Rate Systems Do Not Endure For a fixed exchange rate system to succeed, the participating countries must have similar inflation and growth rates.
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