eco202_note06 - Macroeconomics Theory and Policy(Credible...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 1 (Credible) Pegged (Fixed) Exchange Regime: In pegged system, the Central Bank sets the exchange rate: E = Ē Quantity of Exchange E D S E Ē 1 Ē 2 In order to keep the system credible, the Central Bank must defend the rate Ē , by buying/selling foreign exchange. If the system is credible, then: Ē e = Ē Devaluation Policy: If the Central Bank increases Ē , making domestic currency weaker. Revaluation Policy: If the Central Bank decreases Ē , making domestic currency stronger. 2 (Credible) Pegged (Fixed) Exchange Regime: Flexible Exchange Regime: Market determines exchange rate, E. The Central Bank sets money supply, M (expansionary/contractionary). Pegged (fixed) Exchange Regime: Market determine money supply, M. The Central Bank sets exchange rate, E (devaluation/revaluation). = = + = E E : y Credibilit E E : Pegged E E E * i i : UIP e e = + + + + = + + + ) * i ( L Y P M : LM ) E *, Y , Y ( NX G *) i , Y ( I ) T Y ( c c Y : IS 1 o ML
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This note was uploaded on 08/12/2010 for the course ECO 202 taught by Professor Anjomshoa during the Spring '08 term at University of Toronto.

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eco202_note06 - Macroeconomics Theory and Policy(Credible...

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