Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Bretton Woods system wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Reserve currency wikipedia , lookup
International monetary systems wikipedia , lookup
Currency war wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Foreign exchange market wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Fixed and Floating Exchange Rates A2 Economics A2 Economics tutor2u™ PowerPoint Briefings 2006 Exchange Rate Systems • Countries can choose their exchange rate system: • (1) Free-floating exchange rate • (2) Managed floating system • (3) Semi-fixed exchange rate system • (4) Fully-fixed exchange rate system • (5) Monetary Union with other countries The Sterling Exchange Rate Index United Kingdom - Effective Exchange Rate Index Monthly averages, a rise in the index shows an exchange rate appreciation 115 110 105 Index 100 95 90 85 80 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: EcoWin Floating Exchange Rates • The value of the currency is determined purely by market demand and supply of the currency • No target for the exchange rate is set by the Government • There is no need for official intervention in the currency market by the central bank • Sterling has floated freely on the foreign exchange markets since the UK suspended membership of the ERM in September 1992 Managed Floating Exchange Rate • Currency is usually determined by market forces • Some currency market intervention might be considered as part of demand management • Interest rates may be changed to affect the market value of the currency • No attempt is made to influence the long-term external value of the currency • There are limits to the effectiveness of intervention in markets Semi-Fixed Exchange Rate • The exchange rate is given a specific target • The currency can move between permitted bands of fluctuation on a day-to-day basis • Exchange rate becomes an target of monetary policymaking (e.g. interest rates are set to meet the exchange rate target such as when the UK was in the ERM). • The central bank must intervene to maintain the value of the currency within the set targets if it moves outside the agreed range • Re-valuations of the currency are seen as a last resort or when intervention is proving ineffective Fully-fixed exchange rate • Commitment to a fixed exchange rate – The exchange rate is pegged – There are no fluctuations from the agreed central rate • Examples? • This system achieves exchange rate stability but perhaps at the expense of domestic macro stability • A country can automatically improve its competitiveness by reducing its costs below that of other countries – knowing that the exchange rate will remain stable China and the US dollar China - US$ exchange rate Average of daily rates, Chinese Yuan /US Dollar exchange rate monthly average 8.45 8.40 8.35 CNY/USD 8.30 8.25 8.20 8.15 8.10 China has been criticized by those who say its fixed-rate monetary policy boosts exports by keeping the yuan at a low level. 8.05 8.00 95 96 97 98 99 00 01 02 03 04 05 Source: Reuters EcoWin Currency Boards • Currency board: a country commits, by law, to exchange domestic currency for a specified foreign currency at a fixed rate. • Example: • Argentina adopted currency board between 1991-2001 when one peso can be exchanged to one dollar. • To maintain the currency board arrangement, the constitution of Argentina specifies that the amount of domestic money supply cannot exceed the country’s foreign reserves. Currency boards - Argentina Argentina - Currency Board from 1991-2001 4.0 Argentina, Spot Rates, USD/ARS, Close 3.06 3.5 3.0 USD/ARS 2.5 2.0 1.5 1.0 0.5 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: EcoWin UK Economic History • 1973-1990: UK operated with a managed floating exchange rate. There was some intervention by the central bank to influence the exchange rate and government was in control of interest rates • October 1990- September 1992: UK a member of the European exchange rate mechanism (ERM) – the exchange rate was a specific target of economic policy • September 1992 – present day: the UK has operated with a freefloating exchange rate – no intervention by the Bank of England. Exchange rate is purely market determined • Since 1999, the Euro has been in existence as twelve nations have established a single currency. Sterling floats freely against the Euro and also against the dollar, yen etc. The ERM experiment • Britain entered the ERM in October 1990 • The main aims were to – (i) Achieve exchange rate stability to promote trade – (ii) Provide an anchor for Monetary policy in order to bring down inflation – the UK was fixing sterling against the low-inflation German economy • Under the ERM UK interest rates had to be set at a level consistent with keeping sterling at agreed levels (DM 2.95) • But the weakness of the British economy (recession, rising unemployment and a housing recession) meant that interest rates were probably too high for our own needs • Inflation came down but sterling was weak • The speculators attacked! Coming out of the ERM – Sept 1992 Counting the cost of leaving the ERM • Treasury notes – published in February 2005(!) • On Black Wednesday itself, September 16, 1992, the Bank of England sold some $28 billion of official foreign reserves trying to keep sterling within its ERM target range • This intervention failed and sterling was forced out of the ERM and allowed to float freely • Advantages: – A lower pound boosted the competitiveness of exporters – Interest rates could now come down in order to provide a boost to aggregate demand and take the British economy out of recession – Fears of rising inflation proved unfounded – there was plenty of spare capacity in the British economy at the time Evaluating exchange rate systems Fixed versus floating rates King on exchange rate regimes • Countries have always faced constraints in choosing their exchange rate regime. • Any country can have only two out of the following three: – an independent monetary policy – a fixed exchange rate – an open capital account. – As international financial markets have developed, there has been a general movement to flexible exchange rates supported by credible domestic monetary policies. That is a sensible use of the price mechanism to respond to complex and unpredictable shocks. The Case for Floating Rates • Less need for currency reserves for use in intervention • Useful instrument of macroeconomic adjustment e.g. a lower currency can stimulate aggregate demand • Provides partial “automatic correction” for a trade deficit • Reduced risk of currency speculation • Freedom (autonomy) for domestic monetary policy • Floating exchange rates are not always volatile exchange rates! The Case for Fixed Exchange Rates • Stability - helpful for trade and capital investment • Some flexibility (i.e. the occasional devaluation or revaluation of the currency – known as “realignment”) • Reductions in costs of currency hedging for businesses • Fixed rate provides a discipline on domestic producers to keep costs and prices down and to raise productivity • Reinforces gains in comparative advantage: – If one country has a fixed rate with another, then differences in relative costs will quite easily be reflected in changes in the rate of growth of exports and imports Dollar-Rouble US Dollar- Russian Rouble Exchange Rate Spot exchange rate, daily closing value, roubles per US dollar 35 Russia, Spot Rates, USD/RUB, Close 27.705 30 USD/RUB 25 20 15 10 5 0 92 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: Reuters EcoWin