foreign exchange rate determination Flashcards
what is equilbrium?
: Determined in the Foreign Exchange
Market at the intersection of demand and supply of
foreign currency
what is the foreign exchange market?
where currencies are traded and sold
what is foreign currency intervention
the active management, manipulation, or intervention in the market’s valuation of a country’s currency
why intervene in currencies?
- Fight inflation (want to have a strong currency)
– Fight slow economic growth ( want to have a weak currency so that there are more exports because prices are lower)
depends on if the countrys bank is independent or a subsidiary of its gvt
how do you choose how your gonna intervene in a currency market?
- magnitude of a countrys economy (Size and strength of a countries economy)
- magnitude of trading in its currency (the extent to which a countries currency is actively traded in the foreign exchange market. higher traded currencies may need more intervention)
- country’s financial market development
what are the types of intervention methods?
direct intervention, indirect intervention and currency controls
what is direct intervention?
Active buying and selling of the domestic currency against foreign currencies. It’s when a central bank or government actively enters the foreign exchange market to buy or sell its own currency. They do this with the goal of affecting the exchange rate
what is coordinated intervention?
is when multiple countries
coordinate together to directly intervene and push a
currency’s value in a desired direction
if the goal is to decreases the value of its home currency, what should they do according to direct intervention?
sell its own currency in exchange for foreign currency
what is indirect intervention?
Altering economic or financial
fundamentals that are thought to be drivers of capital inflow
or outflow of specific currencies. using interest rates to manipulate currency
if you want to decreases its currency, what should you do according to indirect intervention?
central bank may lower real interest rates and reduce returns to capital
Japan 2010?
In September 2010, the Bank of Japan tried to do something about the yen’s value going up too much. They did this by buying a lot of U.S. dollars with their own money, about 20 billion dollars in total. They hoped this would make the yen’s value go down, but it didn’t work very well.
wanted to slow the appreciate of the yen
A lot of people from different places, like Beijing, Washington, and London, didn’t like what Japan did. They thought Japan was starting a “new era” of messing with their currency. But even with all that money spent, the intervention didn’t really stop the yen from going up. So, it was seen as not very successful.
the Asian crisis?
• The Thai gvt intervened in the foreign exchange markets directly (using up much of its foreign exchange reserves) and indirectly (raising interest rates).
• The tai central paint allowed the baht to float but it fell 175 against the US dollar and 12% against the Japanese yen. Soon thereafter, the markets ground to a halt and the Thai
central bank allowed the bhat to float • The bhat fell dramatically and soon other Asian currencies
(Philippine peso, Malaysian ringgit and the Indonesian
rupiah) came under speculative attack
what are the three common contributors to the asian crisis?
corporate socialism – *
corporate governance
banking instability
what is corporate socialism?
- Corporate socialism–> the rapidly growing export led countries of Asia had known only stability
- Because of the gvt influence and politics, it was believed that the gvt would not allow firms to fail, workers to lose their jobs or banks to close
- Practices that had persisted for a while were now no longer sustainabl
what is banking instability?
the banking sector had fallen behind
* The central role played by banks in business had even ignore
what is corporate governance?
many firms operating within the dar eastern business enrvioments were largely controlled by either families ir groups related to the governing party or body of the country (cronyism)
* Cronyism–> that the interests of minority stockholders and creditors are often secondary at best to the primary motivations of corporate management
collapse of the argentine peso?
- argetine peso had been pegged to the US dollar
- Argentina adopts a currency board –> the central bank may increase the money supply with increasing its holding in currency reserves which were in US dollars
- currency board backfired and they fell into a recession
- Because the aregtine peso was still pegged to the dollar, aregtine exports become so overpriced
- Gvt spending was not slowing
- the peso was devalued and it was announced later that the peso would be floated
- The moral: currency boards are risky but was worth a try because of argetinas bad experience with exhcbage rates. However, the use of a strict exchange rate system, where gvt nearly gave up control over its sovereignty system, proved to be unsustainable
