国际金融第六章

Why don’t governments let the private market set the exchange rate?




Exchange rates, if left to private market forces, sometimes fluctuate a lot.(overshoot, bandwagon effect) In order to strengthen the competitiveness of domestic goods and services, a government may want to prevent appreciation or to promote depreciation. In order to make import cheaper or to reduce the domestic inflation rate, a government may want to prevent depreciation or to promote appreciation. Other ideas (national honor, exchange rate regime)

Two aspects: rate flexibility and restrictions on use

Government policies toward the exchange rate are categorized according to the flexibility of the exchange rate. One polar case is floating rate, the other polar case is fixed rate.

FLOATING EXCHANGE RATE

Parallel market: A rather nice way of saying “black market.”
In countries with exchange controls, economic agents often find it
profitable to circumvent(避免） official restrictions on buying and selling foreign currencies through the use of parallel markets.

Bretton Woods system: Under this post World War II
agreement organizing international financial affairs between
1944 and 1971, countries were allowed devaluations and
Two aspects: rate flexibility and restrictions on use

Government policies toward the foreign exchange market are of two types:


Those policies that are directly applied to the exchange rate itself. (price control) Those policies that directly state who may use the foreign exchange market and for what purposes. (quantity control) (a policy toward the exchange rate affects the quantity of foreign exchange traded in the market, and a policy restricting use has an impact on the exchange rate.)
one of the architects of the Bretton Woods system.
key terms

One-way speculative gamble: A bet which entails （需
要）minimal or zero risk of loss for the gambler. A persistent payments imbalance under the Bretton Woods system, for example, clearly signaled the likelihood of a devaluation in the case of a deficit or a revaluation in the case of a surplus. There was, therefore, little risk of losing money by moving funds away from the currency to be devalued and toward the one to be revalued. At worst, speculators had to shoulder the transaction costs.
tied their currency values to gold and allowed unrestricted import and export of gold. Officials were expected to adjust the whole economy to defend the exchange rate.
key terms

Capital controls
Adjustable peg


Crawling peg
Clean float


Dirty float
Deficits without tears

key terms

Gold Standard era: From about 1870 to WWI, most nations

Sterilization（对冲）: Using monetary policy to offset the
impact of official intervention on the domestic money supply. For example, a government might purchase its own currency to support its exchange value, but then purchase domestic bonds to restore the domestic money supply. The intent iswenku.baidu.comto manipulate currency values without affecting the domestic economy.
Government policies toward the use of the foreign exchange market can be very restrictive and not restrictive at all. ( This type of policy is related to the problem of currency convertibility and the problem of exchange control. Note the following concepts: fully convertible, convertible for current account transactions, capital control, exchange control.)
Chapter six Government Policies toward the Foreign Exchange Market
Study objectives:





the variety of exchange rate policies countries have used. how a country can respond to pressure on the value of its currency. the implications of temporary versus permanent imbalances in exchange rates. the benefits and costs of foreign exchange controls. how fixed rates have performed in the past. how flexible rates have performed in the past.

Dollar crisis: Denotes the situation prevailing toward the end
of the Bretton Woods era, with the excessive build-up of dollar reserves in the hands of foreign central banks due to the large and persistent U.S. payments deficits. The gold backing of the dollar was questioned, and ultimately the dollar was allowed to float freely starting in 1973.
key terms

International Monetary Fund: An institution created
by the Bretton Woods agreement in 1944, the IMF aims to promote orderly foreign exchange arrangements and to limit exchange rate manipulation. It also lends reserves to its members (187 countries as of 2011) to finance temporary international payments difficulties.
revaluations of an adjustable peg exchange rate when faced with fundamental disequilibria that would otherwise require drastic
domestic adjustment to keep the exchange rate fixed. Keynes was
key terms

Special drawing rights (SDRs): Reserve assets created
by the IMF, beginning in 1970 as a supplement to existing reserve assets. The value of one SDR is determined by the weighted average of a basket of the currencies of the five countries with the largest share of world exports of goods and services—the U.S. dollar, the Japanese yen, the British pound, and the euro (representing France and Germany).