306_Chapter20 - Government in the Foreign Exchange Market...

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Government in the Foreign Exchange Market
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Reasons and forms of gov’t intervention Why might a government want to have a policy toward the foreign exchange market? -- -- -- Types of intervention Choose exchange rate regime Currency control
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Floating vs. fixed Floating exchange rate Clean float – rate determined by demand and dupply Official intervention – the monetary authority buys of sells currency; managed (dirty) float Fixed exchange rate (within a band) What to fix it to – gold, US dollar, a basket of currencies (SDRs) Pegged rate, adjustable peg, crawling peg
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Through official intervention Defending against depreciation The rate of C$ tends to go above the band Bank of Canada sells US$ and buys C$ BoC finances the country’s deficit in its official settlement balance Where does BoC obtain the US$ for the intervention? Defending against appreciation
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306_Chapter20 - Government in the Foreign Exchange Market...

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