国际金融论文英文版

Which is better,floating or fixed rate? Summary：This article first introduces the basic principles of the floating exchange rate system and the fixed exchange rate system ,shows the role of economic stability that monetary and fiscal policy play under the two exchange rate system.Then it introduces the Bretton Woods system and course and causes why fixed exchange rates system changed into floating exchange rate system in 1973, from which it sum up the support and against views of the two exchange rate systems and carry out specific assessment. At last, it summaries experiences since operating the floating exchange rate system,puts international cooperation at a very important place, and puts forward the direction of the floating exchange rate system reform in the future.
Key words：floating exchange rate system ,fixed exchange rate system, expansionary monetary policy, expansionary fiscal policy, Bretton Woods system
First 、Floating exchange rate
F loating exchange rate system is the systtem that Government's monetary authorities do not influence the exchange rate through the foreign exchange market intervention ,in which the exchange rate is completely flexible.
1 、Mechanism of floating exchange rate
The foreign exchange market equilibrium conditions: meet the interest rate parity
R=R*+ (Ee-E) /E， R is the domestic interest rate, R * is the foreign interest, Ee is the expected exchange rate, E is the current exchange rate
Domestic money market equilibrium condition: interaction of money demand and money supply
Ms/P=L(R,Y), Ms is the money supply, P is the domestic price level, R is the national interest,Y is national output
Combine the two formula
Money market equilibrium determines the domestic interest rate R.Then through the " Interest rate parity" determines the country's exchange rate. From this, we know the exchange rate formes from the foreign exchange market and the domestic money market mutual decision. When the two asset market equilibrium is achieved, the current exchange rate E and interest rate R all come out. From this we can see any factor which influences domestic money market equilibrium will affect the country's exchange rate. Following , through AA-DD model let ’s focus our attention on how monetary and fiscal policies affect the exchange rate .
2 、Policy under floating exchange rate system used for economic stability
Short-term equilibrium in open economy ：AA－DD model
AA curve is the combination of all the output and exchange rate ,which lead to assets market equilibrium in short-term, DD curve is the combination of all the output and exchange rate ,which reach product market equilibrium in short-term. The intersection of two curves is short-term equilibrium at which the asset market and product market can reach equilibrium at the same time. Expansionary monetary policy will cause AA curve shifts to the right, expansionary fiscal policy would make DD curve shift to the right.
(1) Expansionary monetary policy
Increasing of the money supply will lead to currency depreciation, expansion of production, thereby increasing employment.
(2) Expansionary fiscal policy
Increasing in government spending leads to increasing demand for money, to promote the interest rates.As a result the currency appreciates.
Second 、Fxed rate
Fixed exchange rate system is the system that the Government's monetary authorities influences the exchange rate through the foreign exchange market intervention, in which the exchange rate is fixed at a certain level.
1 、Introduction of fixed exchange rate mechanism
The foreign exchange market equilibrium: also meet the “interest rate parity”, R = R * + (Ee-E), but because the Central Bank fixed the exchange rate at a certain the level E0 ,expected exchange rate and the current exchange rate is the same . Interest rate parity under the fixed exchange rate is R = R *.
Money market equilibrium: also meet Ms/P = L (R, Y), but because the interest rate remains in R *, the money market equilibrium equation under the fixed exchange rate is Ms/P = L (R *, Y).It means that the Central Bank must make use of the foreign exchange market intervention to make money supply meet the equation.
Put the two together
And different from floating exchange rate system, under fixed exchange rate system the equilibrium interest rate can initially be get by foreign exchange market equilibrium.That is,every c ountry is the recipient of world interest rates.Then through the money market equilibrium their own money supply is determined. For example: a country's output increase will raise the demand for money, to maintain the fixed exchange rate their level of interest rates have to stay at the level of the world ,avoiding increasing.So it requires the central bank must increase the money supply, to prevent currency appreciation. Central bank intervenes in the foreign exchange market by buying foreign exchange intervention.The process of it is to launch the base currency to the market, increasing the money supply.
2 、Policy under fixed rate system used for economic stability
AA－DD model
(1) Expansionary monetary policy
In order to increase output, the central bank will increase the money supply through the purchase of domestic assets, which makes the exchange rate raises. In order to maintain a fixed exchange rate, the central bank has to sell international reserves in the foreign exchange market, in exchange for local currency to reduce the money supply.Ultimately when the increasing of the central bank domestic assets exactly is equal to the reduction of official reserves, the economic returns to the original balance.
A n d totally different from fixed exchange rate system, under floating exchange rate system, monetary policy can not affect the money supply and the output but can only affect the international reserves.That is, in this case monetary policy is ineffective and the central bank losts its ability of using monetary policy to stabilize the economy.
(2) Expansionary fiscal policy
Output increasing raises the demand for currency.To prevent excess money demand from
causing higher interest rate and currency appreciation, the Central Bank must purchase foreign assets in the foreign exchange market,thereby increasing the money supply so that the exchange
rate unchanged ,output increases, and official reserves increases.
And different from monetary policy, fiscal policy works very well in improving output. Compared with floating exchange rate system, under fixed rate system fiscal policy enables output increasing more and has better stimulation in economic. Under floating exchange rate system, expansionary fiscal policy causes the local currency appreciation, followed by the expansion of exports, by which the direct impact of fiscal policy on expanding aggregate demand is partly offset.Under fixed exchange rate system, the foreign exchange market intervention of the Central Bank, making money supply increases in the non-active, has additional expansion effect.
Third 、the fixed exchange rate changes into the floating exchange rate system
July 1944, four countries in New Hampshire's Bretton Woods in the United States held international monetary conference to determine a new fixed exchange rate system. The "Bretton Woods agreement" requires national currencies maintaining fixed rates against the U.S. dollar exchange rate, and the ratio of US dollar to gold price must fix at 35 dollars per ounce. The official reserves of members held in the form of gold or U.S. dollars, and had the right to exchange gold at official price in the U.S. Federal Reserve banks. That is the so-called "double hook": all national currencies were pegged to the dollar, and the dollar was pegged to gold, other currencies indirectly maintaining a fixed exchange ratio with gold. The system is the gold exchange standard based on the basic reserve currency of U.S. dollar .
In the system the United States had a special status, because it did not interfere in the foreign exchange market,but could still use monetary policy to maintain the stability of the economy.If the United States increased the supply of the dollar, in order to maintain the fixed exchange rate against the dollar and prevent their currency from appreciation to the dollar, other countries must use their currency to purchase US dollar assets, expanding their money supply. So we can see that under the dollar standard system the role of monetary policy played by every country is not symmetrical.America can use monetary policy not only to influence its national economy, but also affect foreign economic and other countries in order to keep the fixed rate against the US dollar have to abandon monetary policy on economic stability and was forced to import in the United States monetary policy, all which makes the United States have the huge economic power.
Natural asymmetry of the system, eventually led to crash ofBretton Woods system in 1973 after the war .
After the 1960s American excessive expansion of fiscal policies, resulting in the early 1970s the market’s strong expectation of devaluation on the dollar, a large number of people’s selling dollar makes other national monetary supply sprawl; at the same time, the United States expansionary monetary policy makes inflation of the whole world intensify, so foreign governments refuse to import American inflation because of implementing such a fixed exchange rate system and to pay the appropriate policy of the United States. Later the world economy fell in a series of crisis.In the end, the United States Government unilaterally announced stopping gold convertibility, which is regarded as the proclamation that Bretton Woods system meltdown. Fourth 、compare floating exchange rate system with fixed exchange
rate system about the advantages and disadvantages
Facts have proved that the fixed exchange rate system could not be reinstated.Since 1973, industrialized countries have adopted floating exchange rate system.
1 、Endorsement of floating exchange rate system
(1) Monetary policy autonomy
Under fixed exchange rate system ofBretton Woods system, besides US other countries in order to maintain fixed rate with US dollar, hardly use the monetary policy to achieve the internal and external balance, but can only import US's inflation.In final several years the fixed rate of exchange system's, Central Banks can only strictly limit the international payments day by day to guarantee strict control over the domestic currency supplies. But this control is only successful in the aspect of strengthening the monetary policy function, and will actually have the twist effect on the international trade.
Under the floating exchange rate system, Central Bank restores the control of currency, and does not need to undertake the duty of stabilizing its currency value any longer.Moreover, every country can choose the long-term inflation which the fund is willing to accept, instead of importing foreign country’s inflation passively. One of the most powerful theories supportin g floating exchange rate is that it can isolate the influence brought by the overseas continuing inflation with the help of automatic exchange rate adjustment. This isolation mechanism is the purchasing parity: When world economics' change is about currency, the purchasing parity will maintain effective in long-term, and the exchange rate change will finally counter-balance inflation rate differences exactly among the countries. Under the floating exchange rate system, the international foreign exchange market will be able to adjust automatically the exchange rate to the very point at which the influence of the US inflation on other national is eliminatedThus it avoids the difficult problem on once again determining the currency value under the fixed rate system.
(2) Symmetry
Under Bretton Woods system, the United States is in the center of the international monetary system, leading to two kinds of asymmetry: the U.S. dollar serves as the international reserve currency ,so other countries are "pegged" to dollar.That is, the Fed decided the world's money supply, while other central banks can not decide on the supply of currency; any country could devalue against the dollar, while the dollar can not devalue against other currencies.
F loating exchange rate system can eliminate the asymmetry: other currencies are no longer pegged to the dollar, do not have to be large U.S. dollar holdings, and will be free to determine the money supply; when U.S. monetary policy or fiscal policy change its own exchange rate, there is no special obstruction; all countries exchange rates are resulted from the market not the government.
(3) Automatic stabilizer function
Under fixed exchange rate system, the falls of export demand would lead to " fundamental imbalance."
Under floating exchange rate system, depreciation would make the demand for national products pick up.Under fixed exchange rate system, since the central bank reduces money supply, output will eventually reduces to a lower level. The impact effect is different between the two systems.
Floating exchange rate system can promote the economy itself to adjust relatively painlessly and quick: export demand falls-> reduce demand on the domestic currency->local currency depreciate->increase demand on national goods.
2、Opposition viewpoint against floating exchange rate system
Durring War I to World War II, the practice of floating exchange rates also made people sceptical about it and thought that it will adversely affect the world economy.
(1) Lacks the sense of discipline
Critics argue floating exchange rates: under floating exchange rate central banks have no discipline, so they may take expansion of the monetary policy and fiscal policy.
Supporters of floating exchange rates have this explanation: in the Bretton Woods system, binding of the United States is relatively small, resulting in exacerbating global inflation in the late 20th 60s, and the erroneous policy of the United States will affect economic conditions in other countries .Under the floating exchange rate system, when policy of one government is not implemented, the impact of inflation will be limited in this country.
(2) Destabilizing speculation on currency and money market unrest
Critics argue floating exchange rates: experience and practice of floating exchange rates show that, money market speculation may cause a greater range of exchange rate fluctuations. Expectation on a currency devaluation is to come true automatically. Destabilizing effect from selling the weak currency, not only impedes international trade, but also might make people expect the future inflation, causing wage – price going up spirally again leading to a new round of depreciation.Countries may be caught in the "vicious cycle" of devaluation and inflation.
Another objection is: when there are fluctuations in domestic currency markets, the floating exchange rate will make the economy more vulnerable. The fixed exchange rate can eliminate the impact on the economy from the instability in the domestic money market. If most of the economic impact comes from the domestic money market, the view of supporting fixed exchange rate is stronger.However, if output fluctuations in the market is dominated, then the fixed exchange rate system would have a more adverse impact on the economy.
Supporters of floating exchange rates have this explanation: Under the fixed exchange rate system, when central bank appears unexpected reserves loss, people expect the currency will depreciate, then speculators sell a lot of this currency ,exacerbating the reserve loss ,which may result in unnecessary depreciation. Under the floating exchange rate system, the instability of speculation will eventually lead to jeopardizing the interests of speculators.As a result the speculators with instability will be drived out of the market,and the left is speculators who can speed up the adjustment of the exchange rate approaching to its long-term value to avoid long-term loss.
(3) Not conducive to international trade and international investment
Critics argue floating exchange rates: inherent variability of floating exchange rate makes relative international price become so unpredictable.It will have adverse affect on international trade and investment. The exchange rate for international trade increases risk and cost, so that the trade and revenue from it go down. Return on investment has more uncertainty and it hinders the flow of capital for production.
Supporters of floating exchange rates have this interpretation: international traders can avoid t h e risk through forward foreign exchange market and floating exchange rate makes the forward foreign exchange market expand. Opponents believe that transaction cost of the operation of
forward foreign exchange is too high to believe it can completely eliminate the exchange rate risk.
(4) Mutually uncoordinated economic policy
Critics argue floating exchange rates: the Bretton Woods systems helps to set up the orderly international trade system,in which countries will not use competitive devaluations once happened in the Great Depression. Under t he floating exchange rate, countries’free dom of changeing their exchange rate may motivate them to "beggar thy neighbor". For example, expansionary monetary policy causes currency devaluation to improve their current account, output, employment, but at the same time makes the currency of foreign currencies appreciating with the foreign current account deterioration, that is, the output of own country increasing is at the price that the output of its neighboring countries goes down.
The promoters of floating foreign exchange rates gave such explainations to the situation: The exchange rate adjustments under the Bretton Woods System were unfair,and fixed exchange rate, as a so-called 'solution' to the international balancing issues of monetary policies, had only granted United States an overpower on global monetary regulations, and consequently created abuse of the priority. Under the floating foreign exchange rate policy, many countries had realized the importance of international cooperations, and have been positively exploring and seeking a new form of international cooperation on monetary policy. for better prospects on economical development on participating countries.
(5)The misconception of autonomy
Criticizers of the floating FX rate claimed that domestic monetary policies are not necessarily completely free, but also influenced by movements on FX rates. For example, when money supply of a country increases, the depreciation on local currency causes increase on price level of imported products. To ensure the residents' wellbeing remain unchanged, labourers will claim for wage raises and eventually result into increases on inflation. Moreover, as local manufacturers use imported products as resources of reproduction, depreciation on local currency causes increases on the production costs, and hence on commodity prices. Therefore, floating FX rate has positive impacts on inflation level.
Besides, criticizer had also stated that the insulating effect of floating FX rate on foreign inflation is limited. For example, foreign inflation increases foreign production and meanwhile increases foreign demands on domestic commodoties and hence increases domestic products.
Floating FX rates pomoters' explaination to this is, however, that the influences shall be rectified through use of legally reguated floating FX rates.
Fifth 、the experience of floating exchange rate system since 1973
1 、The experience of running a floating exchange rate system neither fully supports the agreement or confirms the criticism.
Viewpoint of isolating the economy and the inflation for a long time is important, in a short
time possibly is untenable.
The role that the exchange rate takes as the macro economic goal causes the independency which Central Bank enjoys under the floating exchange rate system reducing.
No empirical data provides support for the "vicious cycle".
Viewpoint that flexible exchange rate would hamper international trade and investment is not supported by credible experience.
Durable fixed exchange rate may not be achieved unless the creation of a single currency.
2 、But draw a clear conclusion: International cooperation is important.
We use“both countries model”(the HH -FF model) to explain how a country behavior does affect its trade partner’s economy, to see the importance of the coordination of countries' policy.
National produce market balance (HH curve): Y=C (Y-T) +I+G+CA (EP*/P, Y-T, Y*-T*), Y is national output, T is national tax, C (Y-T) is the expense; I is the investment, G is the government purchases, E is the currency exchange rate, P is the domestic price level, P* is the foreign price level, Y* is the foreign country’s output, T* is the foreign tax, CA (EP*/P, Y-T, Y*-T*) is national current account.
Foreign manufacture market balance (the FF curve): Y*=C* (Y*-T*) +I*+G*-CA (EP*/P, Y-T, Y*-T*)/(EP*/P), C* (Y*- T*) is the foreign resident’s expends, I* is the foreign investment,
G* is the foreign government purchases
Unify both
National expansionary monetary policy
Money supply increases, equilibrium level of national output market increases,the equilibrium level of foreign output market reduces, this is known as "beggar thy neighbor" policy, to improve own situation in the cost of damaging neighboring countries.
National expansionary fiscal policy
Both domestic and foreign output increasesand there is a good cycle in long-term: Y up ->Y * up –> Y up, one country’s expansionary fiscal policy will boost the world economy and achieve a win-win situation.
A country's economic policies have spillover effects which affect the economies of other countries, which shows the interdependence between countries.Because of this dependency, policy coordination in promoting the sound development of world economy plays a very important role. Sixth 、Conclusion: the direction of the floating exchange rate reform Fixed exchange rate is unlikely to resume in the near future. Because maintaining the fixed exchange rate for a long term needs strict control over capital flows, such efforts are doomed to a lack of credibility, not lasting long. So fixed exchange rate system can hardly bring the benefits its supports promised.
With more policy coordination among countrys,the operation of a floating exchange rate system will be more favorable. Enhancing international cooperation and coordination is the overall direction and the main objectives of the current floating exchange rate system. References：
保罗·R ·克鲁格曼茅瑞斯·奥伯斯法尔德《国际经济学》
马正兵《固定汇率制和浮动汇率制的福利比较及启示》价格月刊 2009 年 5 月第 384 期
刘兴华《汇率制度选择问题的理论之争及评析》吉首大学学报 2004 年 1 月第 1 期
赵武《汇率制度和货币政策的协同分析》广东金融学院学报 2005 年 5 月第 3 期
王梁《汇率理论与制度的发展历史》金融理财
刘华《议浮动汇率制下货币政策的调节机理》华中农业大学学报 2008 年第 3 期。