L7 Flashcards
Floating Cur
determined by market forces
Managed floating Cur
cur whose central banks intervene enough that the IMF cant classify them as Free floating
Fixed/Pegged Cur
pegged against another cur or basket of Cur
- often implemented by using a currecny board
No separate legal tender
Adopt another cur e.g. Ecuador adopted USD
Target Zone
FX is kept within a band
Crawling Pegs
Changes are kept lower than preset limits that are adjusted regularly w/inflation
Special arrangement Cur
where a regional bank control the fx system for several countries- Euro
Currecny Risk
- floating- generally symmetric
- Target- less than floating but can be big due to devaluations/revaluations
- pegged- latent volatility
- currency board- frequently collapse
FX Intervention
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
Types of internvention
1.Non-sterilised
2. Sterilized
Non-Sterilized
buying and selling of fx affects the money supply because the central bank doesn’t use offsetting open market operations
Sterilized
an internvention in the fx market that is offset by an open market transaction in domestic market to restore money supply
Tools for intervention
- money supply/ interest rates
- attempt to restrict capital movements
- tax/subsidize international trade to influence demand for foreign currency
Effects of central bank interventions
- currently debates as to whether it causes volatility or calming of markets
- direct effects- supply/demand of currency- arguably said to be negligible
- Indirect effects- affect exch through expectations
Direct Intervention
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
Indirect intervention
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
Cur boards
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
Why not float
some economist believe that pegged currency offers stability
*on average only last 4.67 yrs though
Target Zones
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.
Lag-Lead ops
Lag: Delaying foreign currency inflows to enhance receivable value.
Lead: Prepaying imports to offset post-devaluation cost hikes
