Exchange rate regimes

Question 1

What is competitive devaluation?

Answer 1

Devaluing currency to improve trade competitiveness. Exports are boosted, battles deflationary pressure and lifts economy.

Question 2

Mechanisms to create competitive devaluations

Answer 2

1) FX market intervention (sell home currency to buy foreign currency)
2) Expanding domestic money supply
3) Cutting interest rates
4) Restricting foreign capital inflows

Question 3

5 different regimes

Answer 3

1860-1914 Gold standard
1914-45 Interwar
45-71 Bretton Woods
71-97 Floating Era
97-Present Emerging Era

Question 4

Gold standard

Answer 4

1) Set currency equal to ounce of gold
2) Convert to gold then another currency
3) Growing global trade
Political: Limited capital mobility
Implication: Trade > Capital influence rates

Question 5

Interwar years

Answer 5

1) Currency allowed to fluctuate relative to Gold
2) Didn’t work well - weak currencies sold and strong currencies bought more than proportionate to their strength
3) World Trade did not grow with GDP
Political: Protectionism & Isolationism
Implication: Rising barriers to capital and trade