Transcript Exchange Rates - Year 12 Economics

Exchange Rates
Exchange Rates
FREELY FLOATING
CLEAN FLOATING
DIRTY FLOATING
MANAGED
FLOATING
RIGIDLY FIXED
EXCHANGE RATES
ADJUSTABLE PEG
EXCHANGE RATES
Measuring the exchange rate

Spot Exchange Rate - This is determined by the FOREX market on
a minute-by-minute basis on the basis.

Forward Exchange Rate - a forward rate involves the delivery of
currency at some time in the future at an agreed rate. Companies wanting to
reduce risk

Real Exchange Rate - this measure is the ratio of domestic price
indices between two countries. A rise in the real exchange rate implies a
worsening of international competitiveness for a country.
Free Floating Exchange Rate
The value of £ is determined purely by S & D of
the currency
Sterling has floated freely since the UK
suspended membership of the ERM in
September 1992
Managed Floating Exchange
Rate

The value of the pound determined by market
demand for and supply of the currency

Central banks may to try to iron out big changes in
exchange rates on a day-to-day basis

Managed floating was a policy pursued from 19731990
Semi-Fixed Exchange Rates
Adjustable Peg



The exchange rate is given a specific
target
The currency can move between
permitted bands on a day-to-day basis
The National Bank might have to
intervene to maintain the value of the
currency.
Fully-Fixed Exchange Rates



The government makes a commitment to
a fixed exchange rate
There are no fluctuations from the
central rate
System achieves exchange rate stability
but perhaps at the expense of domestic
stability
Fixed versus floating exchange rates
– which is best for an economy?

1973-1990: UK operated with a managed
floating exchange rate. Intervention by BoE
and govt controlled 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 free-floating exchange rate
1992: UK crashes out of ERM

The government has
suspended Britain's
membership of the ERM

The UK's prime minister
and chancellor tried all
day to prop up a failing £.

Chancellor Norman
Lamont raised interest
rates from 10% to 12%,
then to 15% then back to
12% on same day.
Black Wednesday

George Soros the most high profile of
the currency market investors, made
over 1 billion GBP profit by short selling
sterling.
Black Wednesday

Treasury spent £27 billion of reserves in
propping up the pound.
Greece and Euro?

Stability and Growth Pact

1997Maastricht convergence criteria
Annual budget deficit no higher than 3%
of GDP
a national debt lower than 60% of GDP


The case for floating exchange
rates:

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Reduced need for currency reserves to
prop up the currency:
Useful macroeconomic instrument
Partial correction for a trade deficit:
Reduced risk of currency speculation:
Freedom (autonomy) for domestic
monetary policy:
The Case for Fixed Exchange
Rates

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
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Trade and Investment: Currency
stability
Some flexibility permitted:
Disciplines on domestic producers:
Reinforcing gains in comparative
advantage
Trends
Value of the
Tenge
2003
2004
2005
Exchange rate
Tenge: US$ (av)
149.58
136.04
Exchange rate
Tenge: € (av)
168.79
169.04
2006
2007
2008
132.88
126.09 122.6
122.55
165.42
158.27 167.8
167.75
SOURCES: Kazakh Statistical Agency, Investor's Guide,
Nationalbank Kazakhstan
Kazakhstan

September 2, 2013, Kazakhstan will peg
its tenge to:-

Euro
US dollar
Rouble


20%
70%
10%
Marshall-Lerner Condition and J
Curve

when does a real devaluation improve
the current-account balance of a
country?

Exportsped+Importsped > 1
Rationale behind J-Curve

In short run after a devaluation, M and X
will remain unchanged.

In the long run consumers will have a
chance to adjust.
The J Curve