1272014 page 6 central bank uses foreign currency

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Unformatted text preview: /27/2014 Page: 6 Central Bank uses foreign currency reserves to buy excess supply of home currency • If reserves run out – bank cannot fulfil promise • Resulting in devaluation Speculators can induce or hasten this crisis • Economic stability • Reduce uncertainty in less developed financial systems to promote trade and investment GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 3 3. Exchange rate regimes Variations between flexible and fixed regimes Hybrid floating systems (Central bank intervenes in FX market Completely fixed Currency bands • • • • Dollarization Gold standard • Currency boards Completely flexible • Dirty / managed float Crawling peg • Floating Example countries: Argentina Hong Kong Ecuador Panama 1/27/2014 Page: 7 US UK Japan Canada Brazil GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Takeaways Exchange rates, inflation and interest rates • Exchange rate: • Price of one currency in terms of another • So far, price depends on: • Inflation (PPP) Inflation rate Interest rate • Interest rates (IRP) Exchange rate • Governments can take an active role in determining the exchange rate 1/27/2014 Page: 8 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 4 Where this fits into the big picture Economics International Trade Exchange Exchange Rate Determinants; managing exposure Absolute and comparative advantage Policy (relation with FDI) Internationalization strategies Balance of payments Trade policy and agreements Culture Functions Currency crises Globalization controversies Legal system, country risk Organization design Project 1: Country Profile 1/27/2014 Firm Environment Page: 9 Conclusion Conclusion Introduction Strategy Project 2: Firm Internationalization Strategy GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Recap and Framing Exchange rate as a price • Intersection of supply and demand Supply • Affected by: • Inflation rate • Interest rate Price • Trade balance • Capital flows • Market sentiments Demand Quantity 1/27/2014 Page: 10 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 5 Agenda 1. Balance of payments 2. National income accounts 3. The trilemma of international finance 1/27/2014 Page: 11 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Agenda 1. Balance of payments 2. National income accounts 3. The trilemma of international finance 1/27/2014 Page: 12 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 6 1. Ba...
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This note was uploaded on 04/02/2014 for the course STRATEGY 310 taught by Professor Staff during the Winter '08 term at University of Michigan.

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