Monetaries Policy and Exchange Rate Flashcards
Rising Confidence in Boversia (graph)(imaginary country)
what relationship capture the Phillips curve?
- output affect inflation
Rising Confidence and Output Stabilization (graph)
Effects on Components of Spending (graph)
Exchange Rate Policies and Their Pitfalls (graph)
A Domestic Shock and Output Stabilization (graph)
Definition of Foreign exchange interventions by the central bank:
- purchases and sales of foreign currencies by central banks
Definition of International reserves by the central bank:
- liquid assets held by central banks that are denominated in foreign currencies
Foreign Exchange Interventions and International Reserves (order)(graph)
Interventions and the Exchange Rate (graph)
Why the central bank intervene in the exchange rate?
The motive for foreign exchange interventions is to escape this dilemma. Interventions allow policymakers to stabilize output and the exchange rate at the same time.
Do exchange rate intervation work ? (againts it)
- Yes, but little and/or unreliable
- The size of interventions suggests that the shifts are slight and the effects on exchange rates are small.
- Interventions can’t offset major shocks such as capital flight, as we’ve assumed up to now.
Do exchange rate intervation work ? (in favor)
- Yet not all economists dismiss interventions.
- Some suggest that interventions can change exchange rates even if they are small
- Interventions signal central banks’ desire to adjust exchange rates (Expectations of future exchange rate movements affect current rates.)
- trigger self-fulfilling expectations
- Fatum and Hutchinson (University of California) concluded that interventions do influence exchange rates.
Definitions of Capital controls:
- Regulations that restrict capital inflows or outflows
Capital Controls and the Exchange Rate (graph)(effects)
what are the Effects on Exchange Rates of capital control?
- Avoid capital flight
- Countries use capital controls for the same reason that they use foreign exchange interventions: to ease the trade-off between output and exchange rate stability.
- This stabilizes the exchange rate without an interest rate adjustment that would destabilize output.
what critique have the Capital Controls system?
- Restrictions on capital inflows make it harder for a country’s firms to finance investment.
- Restrictions on outflows prevent savers from earning high returns on foreign assets. In general, capital controls impede the flow of savings to the countries where savings are most productive.
- Critics argue that controls hurt the economy in the long run by reducing foreign investment.
Foreigners won’t put money in a country if the government might prevent them from taking it back out.
with what policies china had to controlled its exchange rate?
- restrictions on capital inflows
- foreign exchange interventions
Definition of Floating exchange rate:
- A policy that allows the exchange rate to fluctuate in response to economic shocks
Definition of Fixed exchange rate
- A policy that holds the exchange rate at a constant level
A Fixed Exchange Rate: Pros and Cons (graph)
Definition of Devaluation:
- resetting of a fixed exchange rate at a lower level
- When a country has a fixed exchange rate,
Definition of Revaluation:
- resetting of a fixed exchange rate at a higher level
Fixed Exchange Rates and Inflation (graph)
The Instability of Fixed Exchange Rates (graph)
Definition of Speculative attack: (Currency speculators)
- strategy of selling a currency with a fixed exchange rate to force and to profit from a devaluation
what was the The Bretton Woods System?
- Under this system, all currencies were fixed against the dollar.
- Fixed rates were maintained through a combination of interest rate adjustments, capital controls, and interventions.
what Compared advantage have a common currency system compare to a traditional fixed-rate system ?
- A currency union creates absolute fixity of exchange rates
- A currency union eliminates the costs of changing currencies
- A common currency helps people compare prices across different countries.
what undesirable charateristic have the One-Size-Fits-All Policy?
- The main drawback of a currency union is the basic problem with fixed exchange rates: the loss of national monetary policy.
