FROREIGNEXCHANGEREGIMEfinal..docx

The foreign exchange market Foreign Exchange rate regimeCross-border business transactions + increased international flows of capital result in the rise of markets for FX and capital, the interdependence of country’s monetary financial policies and the International Monetary System as an institutional arrangements that govern exchange rates.The Bretton Woods SystemThe Bretton Woods system could work only as long as the US inflation rate remained low and the US did not run a balance-of-payment deficit.The contemporary SystemThe pegged exchange ratePegged to a currency or a basket of main currencies, allowing their currency to fluctuate within a zone around the basket. Fixed pegged: pegged at a fixed rate. E.g. pegged to US dollarPegged but manage float within a pre-defined band. E.g. HongkongCrawling peg: pegged and allows appreciate/depreciate gradually (frequently but in small increments). Is a fixed exchange rate tied or pegged to the value of another currency with provisions to prevent it from falling sharply in value in too short a time.E.g. ChinaTYPES OF EXCHANGE RATE REGIMESThree distinct types of exchange rate regimes: floating, fixed and peggedIn Friedman’s sense, strictly fixed and floating rates are regimes in which the monetary authority is aiming for only one target at a time and they are members of same free-market family (FriedmanMundell, 2000).Floating exchange regimecentral bank sets monetary policy but no exchange rate policyMonetary base is determined domestically by a central bank(Monetary base: The total amount of a currency that is either circulated in the hands of the public or?in the?commercial bank deposits held in?the central banks reserves)The floating exchange rate (managed floating with no pre-determined path for the exchange rate, independently floating)The exchange rates have become more volatile and far less predictableDetermined by market (supply and demand)Monetary policy autonomy and flexibility就浮动形式而言，如果政府对汇率波动不加干预，完全听任供求关系决定汇率，称为