Week 4 Exchange Rate Regimes And Financial Crises Flashcards
What are the attributes of a ideal currency ?
Exchange rate stability
Full financial integration
Monetary independence
What are the 3 key points of impossible trinity
The 3 points are
Free capital flows
Sovereign monetary policy
Fixed exchange rate
How many combination can have a impossible trinity
Only can have 2 , because the forces of economics does not allow the simultaneous achievements of all 3
Explain flexible exchange rate regime of supply and demand
Regarding to appreciation or depreciation
It any roles reserved to the government in this type of exchange rate ?
The flexible exchange rate is defined by the forces of supply and demand of the market, which will result in a appreciation or depreciation accordingly.
In flexible exchange rate the government does not intervene because the fiscal and monetary policies can be employed to achieve goals other than equilibrium in balance of payments
Fixed exchange rate regime exchange , are driven by supply and demand ? Has the government allowed to intervene ?
In fixed exchange rate the government has full control , so once a imbalance is found the government can apply monetary or fiscal policies to contract or expand the economy
Tell me the argument in favour and against of flexible exchange rate
Favour - easier external adjustment and national policy autonomy
Against- exchange rate uncertainty may jumper international trade and no safe guards to prevent crises.
Tell me the argument in favour and against fixed exchange rate
Favour - reduces uncertainty and can promote international trade and cross- country investments
Against - external adjustments not automatic , government intervention needed and no national policy autonomy because of fiscal and monetary policies needed to be employed to maintain fixed exchange rate
What is the best exchange rate regime for MNCs
If a country economy is stable and well manage , such as low inflation , low unemployment, the exchange rate regime does not matter.
However in case that does not happen so we need to take into consideration that
Flexible exchange rate regime, the foreign value of the asset and profits of subsidiaries will be too volatile
In fixed exchange regime the government need to intervene in the foreign exchange market , which can result in a massive depreciation which increase the risk substantial
How exchange rates are set ?
Market clearing prices that equilibras-te supplies and demands in the foreign exchange market so it is determine by supply and demand
Also when supply and demand cross we find the equilibrium
How to calculate the appreciate or depreciation of a currency
Appreciation e1-e0/e0
Depreciation e0-e1/e1
What are the factores that affecting exchange rates ?
And how they affect
Inflation rates
High inflation depreciate the currency
Interest rates
High interest rate appreciate the currency
Economic growth
Demand for domestic asset up means strong currency
Political risk
High risk currency so low value
Explain the capital account correlation with the interest rates
Normally investors look for high interest rate because provide high returns
How inflation effect the current account ?
Important can change a country inflation rate , because a low inflation can be the reason that important are relative cheap and make domestic sellers reduce the price to compete with imports
