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Monetary System s

Monetary System s. Lecture 6 Vallyon Andrea. Agenda. Presentation about the money history Exchange rate systems History of I nternational M onetary S ystems . Learning goals. To describe the different types of exchange rate systems Understand the history of monetary systems.

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Monetary System s

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  1. Monetary Systems Lecture 6 Vallyon Andrea

  2. Agenda • Presentation about the money history • Exchange rate systems • History of InternationalMonetarySystems

  3. Learning goals • To describe the different types of exchange rate systems • Understand the history of monetary systems

  4. Corematerial • Stephen Valdez: An Introduction to Global Financial Markets, Macmillan Press Ltd.1997 • CH 7, page:137- 173

  5. Dilemma of simplified exchange rate policy • Fixed or free-float? • Two extremities + others = exchange rate systems

  6. Exchange rate definitions • The price of one currency expressed in terms of another currency. • U.S. dollar buys 1.40 Canadian dollars, the exchange rate is 1.4 to 1. Also called foreign exchange rate. • The exchange rate is the price at which the currency of one country can be converted to the currency of another

  7. Changes in exchange rates • effects on the profits • the value of foreign investments held by individual investors. • For a Swiss investor owning Japanese securities, a strengthening of the Swiss Franc relative to the yen tends to reduce the value of the Japanese securities because the yen value of the securities is worth fewer francs

  8. EXCHANGE RATE SYSTEMS 1 • Freely floatingor flexible exchange rate • Market forces of supplyand demand determinerates. • Forces influenced by a. price levels b. interest rates c. economic growth • Rates fluctuate over timerandomly.

  9. Freelyfloatingsystem

  10. Freely floatingor flexible exchange rate Advantages • No problems with international liquidity • Automatic correction in the balance of payment • Insulated from external events Disadvantages • Uncertainty • Speculation can be destabilising specially in the short run • Todays crises questioning the power of the market

  11. EXCHANGE RATE SYSTEMS 2 • Managed Float (Dirty Float) • Market forces set rates unlessexcess volatility occurs. • The government intervenes to influence the exchange rate

  12. EXCHANGE RATE SYSTEMS 3 • Target-Zone Arrangement • Central bank intervenes tosettheexchangerateatthepreannouncedprice, bysellingorbuyingforeignexchangecurrencyinreturnforthenationalcurrency • Market forces constrainedto upper and lower range of rates • Members to the arrangementadjust their national economicpolicies to maintain target.

  13. Crawlingpegin Hungary (1995-2001) • After a period of increasingexternal and internalimbalancies : crawlingpegwasintroducedby Bokros government • The currency is peggedto USD and Euro • Band:+/ - 2.5% • Monthlydevaluationat a preannouncedrate (progressivelydecreasingcrawlfrom 1.9% to 0.25) • The interest ratewasdecreasedalso • Result: inflationdroppedfrom 31% to 10.8% (1998)

  14. Exchange rateband • Limit within the rate of exchange can fluctuate • Used as an intermediate scheme between fixed and free float regimes • Maximum rate: ceiling rate • maximum rate the CB is willing to allow in the interbank market. • At this rate the CB will ?Foreigncurrency to maintain the rate of exchange at that level • Minimum rate: floor rate the CB will allow • Atthislevelthe CB will?foreigncurrencysothattheexchangerateremainsatthatlevel

  15. Crawlingpegin Hungary 2001-2008 • 2001-2002: Widening the band: +/-15% • 2003: depreciation of the middle of the band: 283.36 forint/euro • 2008: elimination of band: floating rate

  16. Tools of intervention • Why to intervene? • Exchange rate strongly effects competitiveness • Tools: • Interest rate • Open market activity • Compulsorydepositrate

  17. Thankyou!

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