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0321316762_IM_17 - Chapter 17 Fixed Exchange Rates and...

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Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention T Chapter Organization Why Study Fixed Exchange Rates? Central Bank Intervention and the Money Supply The Central Bank Balance Sheet and the Money Supply Foreign Exchange Intervention and the Money Supply Sterilization The Balance of Payments and the Money Supply How the Central Bank Fixes the Exchange Rate Foreign Exchange Market Equilibrium Under a Fixed Exchange Rate Money Market Equilibrium Under a Fixed Exchange Rate A Diagrammatic Analysis Stabilization Policies With a Fixed Exchange Rate Monetary Policy Fiscal Policy Changes in the Exchange Rate Adjustment to Fiscal Policy and Exchange Rate Changes Balance of Payments Crises and Capital Flight Box: Brazil’s 1998–9 Balance of Payments Crisis Managed Floating and Sterilized Intervention Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention Foreign Exchange Market Equilibrium Under Imperfect Asset Substitutability The Effects of Sterilized Intervention with Imperfect Asset Substitutability Evidence on the Effects of Sterilized Intervention Reserve Currencies in the World Monetary System The Mechanics of a Reserve Currency Standard The Asymmetric Position of the Reserve Center
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96 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition The Gold Standard The Mechanics of a Gold Standard Symmetric Monetary Adjustment Under a Gold Standard Benefits and Drawbacks of the Gold Standard Bimetallic Standard The Gold-Exchange Standard Appendix I: Equilibrium in the Foreign-Exchange Market with Imperfect Asset Substitutability Appendix II: The Timing of Balance of Payments Crises Online Appendix: The Monetary Approach to the Balance of Payments Online Appendix: Fixing the Exchange Rate to Escape From a Liquidity Trap T Chapter Overview Open-economy macroeconomic analysis under fixed exchange rates is dual to the analysis of flexible exchange rates. Under fixed exchange rates, attention is focused on the effects of policies on the balance of payments (and the domestic money supply), taking the exchange rate as given. Conversely, under flexible exchange rates with no official foreign-exchange intervention, the balance of payments equals zero, the money supply is a policy variable, and analysis focuses on exchange rate determination. In the intermediate case of managed floating, both the money supply and the exchange rate become, to an extent which is determined by central-bank policies, endogenous. This chapter analyzes various types of monetary policy regimes under which the degree of exchange-rate flexibility is limited. The reasons for devoting a chapter to this topic, almost thirty years after the breakdown of the Bretton Woods system, include the prevalence of managed floating among industrialized countries, the common use of fixed exchange rate regimes among developing countries, the existence of regional currency arrangements such as the Exchange Rate Mechanism through which some
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