Chapter 17.ppt

Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Preview Balance sheets of central banks Intervention in the foreign exchange market and the money supply How the central bank fixes the exchange rate Monetary and fiscal policies under fixed exchange rates Financial market crises and capital flight Types of fixed exchange rates: reserve currency and gold standard systems Chapter 17 The Main Goals We study (1)how central banks intervene in the foreign exchange market to fix exchange rates and (2)how macroeconomic policies work when exchange rates are fixed Chapter 17 This chapter will help us understand the role of central bank foreign exchange intervention in the determination of exchange rates under a system of managed floating. Definition：Managed floating exchange rate is a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed. Introduction Many countries try to fix or “peg” their exchange rate to a currency or group of currencies by intervening in the foreign exchange market. Many with a flexible or “floating” exchange rate in fact practice a managed floating exchange rate. The central bank “manages” the exchange rate from time to time by buying and selling currency and assets, especially in periods of exchange rate volatility. /external/np/mfd/er/2006/eng/0706.htm Exchange arrangements with no separate legal tender The currency of another country circulates as the sole legal tender (formal dollarization), or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Adopting such regimes implies the complete surrender of the monetary authorities control over domestic monetary policy. Currency board arrangements A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on t