LEC VIII - Government Policy & Forex

LEC VIII - Government Policy & Forex - Government...

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Government Policy & Forex Markets
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Kinds of X-rate Arrangements TYPE EXAMPLE Dollarization Ecuador Pegged rate China Pegs with bands   Denmark --pegged to euro Adjustable Pegs Bangladesh--pegged to euro Crawling Pegs  Israel Managed Floating India Independently Floating New Zealand
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Problem 20.6 Pugelovian government trying to fix x- rate at 3 pnut/$ [+/- 2%]. Markets are  likely to trade at 3.5pnut/$. How would the government officially  defend the pegged rate? How would they use exchange controls to  defend the pegged rate? How would they use domestic interest  rates to defend the pegged rate?
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20.6 a. The market is attempting to depreciate the pnut  (appreciate the dollar) toward a value of 3.5 pnuts per  dollar, which is outside of the top of the allowable  band (3.06 pnuts per dollar). In order to defend the  pegged exchange rate, the Pugelovian monetary  authorities could use official intervention to buy pnuts  (in exchange for dollars). Buying pnuts prevents the  pnut’s value from declining (selling dollars prevents  the dollar’s value from rising). The intervention  satisfies the excess private demand for dollars at the  current pegged exchange rate.     
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20.6
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This note was uploaded on 11/07/2010 for the course ECON 0001 taught by Professor Kitsikopoulos during the Spring '08 term at NYU.

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LEC VIII - Government Policy & Forex - Government...

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