15-word_on_exchange_rates_15

15-word_on_exchange_rates_15 - ECON 4311: The Economy of...

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ECON 4311: The Economy of Latin America Nominal Exchange Rates, Currency Substitution and Dollarization
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Exchange Rate Regimes ± Fixed Nominal Exchange Rate ± Floating Nominal Exchange Rate - Pure Floats - Dirty Floats
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Fixed Exchange Rates ± Monetary authority is committed to maintain a particular exchange rate. ± If there is an attack on the domestic currency (i.e., in- creased demand for dollars), the monetary authority in- tervenes in the foreign exchange market by selling its re- serves to preserve the parity. ± Example: Argentina during the Convertibility period (one of the components was the one peso = one dollar fixed exchange rate).
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± Several countries in Latin America have used the fixed exchange rate as an anchor for the stabilization plans: it provides a transparent and easy to monitor variable for the government’s policies. ± Among the drawbacks: if there is inflation, then the real exchange rate will become appreciated, thus hurting ex- ports and promoting capital flights. ± Also, in the event of speculative attacks to the domestic currency, the monetary authority can rapidly depleted its reserves by trying to defend the fix.
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This note was uploaded on 01/18/2012 for the course ECON 4311 taught by Professor Staff during the Spring '08 term at Minnesota.

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15-word_on_exchange_rates_15 - ECON 4311: The Economy of...

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