4 Exchage rate regimes

4 Exchage rate regimes - Exchange Rate Regimes Picking an...

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1 Exchange Rate Regimes Picking an Exchange Rate Regime for Our Country and for the World
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2 Country Level: What’s to Pick What the exchange rate applies to ? Convertibility Some country don’t allow their domestic currency to convert to foreign currency for capital account purposes. How is the exchange rate determined? Exchange rate regime
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3 Convertibility Fully convertible Current account convertibility Capital account convertibility Capital outflows (foreigners) Capital flight (residents) Multiple exchange rates
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4 Flexibility and determinants of the ER Free Float Managed Float Floating ER Fixed or Pegged ER Crawling Peg Peg or Fixed rate Currency Board
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5 Advantages of Flexible rates Government does not need to maintain reserves No(?) / Less speculation against currency – destabilizing speculation not profitable Government free to follow own monetary policy More trade + investment if fewer restrictions ER handles “shocks”
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6 Disadvantages of Floating rates ER variability means less trade and investment Thin markets ? Independent monetary policy = no discipline
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7 Advantages of Peg Stable rate => more trade and investment Need to maintain peg = discipline on domestic policy
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8 Disadvantages of Peg Speculation is destabilizing – crises are possible if …. Need for exchange controls reduces trade and investment Domestic economy has to absorb international shocks Less scope for independent monetary policy Sterilization costs
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9 Historical experience Stability vs. flexibility Can we have some of both ?
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This note was uploaded on 02/09/2010 for the course ECON ecn302 taught by Professor Brada during the Spring '10 term at ASU.

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4 Exchage rate regimes - Exchange Rate Regimes Picking an...

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