L7

Question 1

Floating Cur

Answer 1

determined by market forces

Question 2

Managed floating Cur

Answer 2

cur whose central banks intervene enough that the IMF cant classify them as Free floating

Question 3

Fixed/Pegged Cur

Answer 3

pegged against another cur or basket of Cur

• often implemented by using a currecny board

Question 4

No separate legal tender

Answer 4

Adopt another cur e.g. Ecuador adopted USD

Question 5

Target Zone

Answer 5

FX is kept within a band

Question 6

Crawling Pegs

Answer 6

Changes are kept lower than preset limits that are adjusted regularly w/inflation

Question 7

Special arrangement Cur

Answer 7

where a regional bank control the fx system for several countries- Euro

Question 8

Currecny Risk

Answer 8

1. floating- generally symmetric
2. Target- less than floating but can be big due to devaluations/revaluations
3. pegged- latent volatility
4. currency board- frequently collapse

Question 9

FX Intervention

Answer 9

where central bank buys or sells foreign currency in an attempt to stabiles the exch or to correct misalignments in fx markets

only happens in crisis or cur under a speculative attack

Question 10

Types of internvention

Answer 10

1.Non-sterilised
2. Sterilized

Question 11

Non-Sterilized

Answer 11

buying and selling of fx affects the money supply because the central bank doesn’t use offsetting open market operations

Question 12

Sterilized

Answer 12

an internvention in the fx market that is offset by an open market transaction in domestic market to restore money supply

Question 13

Tools for intervention

Answer 13

1. money supply/ interest rates
2. attempt to restrict capital movements
3. tax/subsidize international trade to influence demand for foreign currency

Question 14

Effects of central bank interventions

Answer 14

1. currently debates as to whether it causes volatility or calming of markets
2. direct effects- supply/demand of currency- arguably said to be negligible
3. Indirect effects- affect exch through expectations

Question 15

Direct Intervention

Answer 15

central banks can use their currency reserves to buy/sell a specific currecny in the fx market to place upward/downward pressure on that currency

Question 16

Indirect intervention

Answer 16

To increase (decrease) the value of its home cur, a central bank attempts to rise (lower) I, thereby attracting (restricting) foreign demand for the home cur to buy high yield secur

Question 17

Cur boards

Answer 17

have money making capabilities
indep of gov, but is backed by foreign reserve cur and convert into reserve at fixed rate
seen to cut inflation without major harm to economy
cant rescue banks- no fiscal deficits

Question 17

Why not float

Answer 17

some economist believe that pegged currency offers stability
*on average only last 4.67 yrs though

Question 18

Target Zones

Answer 18

Speculative attacks
Defending:
*Open market operations: Buying or selling currency.
*Raising interest rates to deter speculation.
*Implementing capital controls.

Using Lag- lead ops

Challenges for small central banks due to limited reserves.

Crawling peg: Adjusts exchange rates based on inflation differentials.

Question 19

Lag-Lead ops

Answer 19

Lag: Delaying foreign currency inflows to enhance receivable value.
Lead: Prepaying imports to offset post-devaluation cost hikes