XRs And XR Systems 3 Flashcards
What is a fixed XR system
Government / central bank fixed currency value
It is pegged to another currency
What is a managed floating XR
- set by market forces
- central bank may intervene
What tools can be used for managing a floating XR
- monetary policy interest rates
- QE
- direct buying / selling in the currency market
- taxation of overseas currency deposits and capital controls
Examples of countries with manages XRs
Japanese Yen
Swiss Frank
When does a competitive devaluation (dirty floating) occur
When a country deliberately intervenes to drive down the value of their currency to produce a competitive raise to demand and jobs in their export industries
When may a country try a competitive devaluation
When faced with a deflationary recession or to attract FDI
Advantages of a floating XR
- reduces the need for large currency reserves
- freedom to set monetary policy interest rates to meet domestic objectives
- prevent imported inflation
- partial automatic correction for a current account deficit
Evaluation on a floating XR
- no guarantee of stability
- lower inward investment
- doesn’t always correct a persistent BoP deficit
Advantages of fixed XRs
- confidence for inward investment
- stability to control inflation
- lower borrowing costs
- responsibility on government macro policies
- less speculation
Evaluation of a fixed XR
- reduced freedom to use interest rates for other macro objectives
- many developing countries do not have sufficient foreign currency reserves to be able to maintain a fixed XR
What countries may use a fixed XR
Those who are want to control inflation
What countries may use a managed floating XR
Export-dependent economies
