Chapter_10_Exchange_Rates_and_Foreign_Ex

When comparing goods and services across countries we

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When comparing goods and services across countries, we can use the exchange rate to compare prices in same currency terms. Changes in the exchange rate affect the relative prices of goods across countries: Appreciation in the home currency leads to an increase in the relative price of its exports to foreigners and a decrease in the relative price of imports from abroad. A depreciation in the home currency leads to a decrease in the relative price of its exports to foreigners and an increase in the relative price of imports from abroad.
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Objectives 2. Exchange Rates in Practice Gain familiarity with different kinds of observed exchange rate behavior Understand the classification of this behavior via exchange rate regimes Understand a simple and coarse classification that is widely used: fixed versus floating Learn the classifications of exchange rate regimes and be aware of the existence of intermediate regimes
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Exchange Rate Regimes: Fixed versus Floating To build models that explain observed behavior, it is important to become familiar with common patterns. Exchange-rate regimes refer to categories that reflect policy choices made by governments. For most purposes, two general categories of exchange-rate behavior are sufficient: Fixed exchange-rate regimes Floating exchange-rate regimes
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Exchange Rate Regimes: Fixed versus Floating Fixed exchange rate (pegged exchange rate) Where a country’s exchange rate does not fluctuate at all (or only narrowly) against some base currency over a sustained period, usually a year or longer. Government intervention in the market for foreign exchange is needed to maintain the fixed exchange rate. Floating exchange rate (flexible exchange rate) A country’s exchange rate typically fluctuates over time. The government makes no attempt to peg the exchange rate against a base currency. Appreciations and depreciations may occur from year to year, each month, even by the day or every minute.
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Recent Exchange Rate Experiences Developed Countries
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Recent Exchange Rate Experiences Developed Countries Developed Countries There is a great deal of short-run exchange rate volatility. U.S. dollar is floating relative to the Japanese yen, British pound, and Canadian dollar (also known as the “loonie”) Patterns for the euro are similar. Danish krone maintains a ±2% exchange rate band to the euro through intervention by the Danish central bank.
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Recent Exchange Rate Experiences Developing Countries
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Recent Exchange Rate Experiences Developing Countries Developing Countries Exchange rates in developing countries tend to be more volatile. Some countries adopted fixed exchange rate regimes, but were forced to abandon the peg after an exchange rate crisis.
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