Lesson_69_The Mechanics of Fixed Exchange Rates

Lesson_69_The Mechanics of Fixed Exchange Rates - 1 Lesson...

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Unformatted text preview: 1 Lesson 69 1 The Mechanics of Fixed Exchange Rates Some countries choose to fix the value of their currency relative to some other currency or currencies This lesson describes the mechanics involved and explains how intervention in the FX market has implications for a countrys money supply Lesson 69 2 Until the summer of 2005, Chinese government pegged the value of their currency (the yuan, also known as renminbi) to the U.S. dollar Chinese government let yuan appreciate sharply in summer 2005, followed by a more managed appreciation of the currency Lesson 69 3 2 Lesson 69 4 Lesson 69 5 Until the summer of 1997, Thai government pegged the value of their currency (the bhat) to the U.S. dollar FX and financial crisis hit in summer of 1997, forcing Thai government to let value of Bhat depreciate Lesson 69 6 3 Lesson 69 7 Lesson 69 8 In both instances, currency values were fixed around a par value, being allowed to fluctuate by a small amount around par How did the Chinese and Thai governments accomplish this? Lesson 69 9 In the context of fixed exchange rate, par value (or central value) is the target value $ Q E $ FC E = par E 4 Lesson 69 10 There may be some acceptable deviation from par $ Q E $ FC E = par E par E + par E Lesson 69 11 The difference between the upper and lower limit of the exchange rate is the spread (or band ) $ Q E $ FC E = par E par E + par E Lesson 69 12 The smaller the spread, the more tightly fixed the exchange rate is $ Q E $ FC E = par E par E + par E 5...
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Lesson_69_The Mechanics of Fixed Exchange Rates - 1 Lesson...

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