4.1 - Managed Exchange Rates

Question 1

What are the principles of a managed exchange rate?

Answer 1

Usually set by market forces
Central Bank may intervene
Key target of monetary policy

Question 2

How does the central bank influence a managed rate?

Answer 2

Buying to support currency (Sell FX)
Selling to weaken currency (Buy FX)
Change IR policy (Hot Money)

Question 3

What are the primary policy tools for managing a managed rate?

Answer 3

Changing monetary policy
Quantitative easing
Currency market participation
Overseas tax + capital control

Question 4

How does changing monetary policy influence a managed rate?

Answer 4

Use interest rates to appreciate/depreciate currency
Hot money movements

Question 5

How does quantitative easing influence a managed rate?

Answer 5

Increases liquidity in banking system
Lower IR
Usually causes outflow of money
Depreciation

Question 5

How does currency market participation influence a managed rate?

Answer 5

Direct buying/selling of currency

Question 6

How does overseas tax + capital control influence a managed rate?

Answer 6

Tax on foreign deposits in banks cuts profits from hot money
Control on free flows of capital into/out of a nation

Question 7

How does the central bank raise the value of domestic currency?

Answer 7

Buy currency
Reduces global supply
Increased demand

Question 8

How does the central bank lower the value of domestic currency?

Answer 8

Sell currency
Increases global supply
Lowers demand