lecture9 - Chapter 17 motivation Thus far we imagined a...

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Chapter 17: motivation Thus far we imagined a world where exchange rates float, and we developed models for that purpose. In reality many countries do not allow their exchange rate to float absolutely freely . Some try to keep E pegged, to the dollar, or euro, or maybe a basket of currencies. Some try to “manage” their E so that it is flexible but doesn’t move “too much.”
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Chapter 17: motivation Why do countries do this? What are the costs and benefits of a fixed exchange rate ? Theory: We do not need to develop a whole set of new models to describe this scenario. We just need to re-interpret our existing models wisely.
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Chapter 17: outline Examples of fixed exchange rates, past and present Central bank balance sheets Central bank intervention How do central banks fix? Implications for asset approach model of E How does policy work in this new environment
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The state of play Table 17-1 in the text show roughly how the world breaks down by exchange rate arrangement. Who says they fix and who says they float? – Ask the IMF. Go to International Financial Statistics and see Table “Exchange Rate Arrangements.” This is by no means an unchanging classification. It might also be very misleading.
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Who floats? who fixes? who cares? Today, many developed countries ostensibly float. But in reality the $/€, $/£, $/¥, $/C$, $/A$ may be the only really floating rates (and even then you’ll hear Treasury Secretaries muttering about E concerns). For almost all other countries, they report to the IMF that they are officially floating. This is a fib! Data show that many countries are “secretly” fixing: their E never wavers against the $ (or ¥) more than a smidge. Coincidence?! We think not. In addition there are many countries who freely admit they are fixers.
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Who floats? who fixes? who cares?
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