Book: Exchange Rate Regimes Flashcards
How foes pegged currencies change real exchange rates
By being cheaper in real terms lowering its prices
What is the equation for output in a fixed exchange regime
Y=f(EP/P(),G,T,r,Y(*))
- + - - +
Does the output return to potential even in a fixed exchange rate regime in the medium run
Yes but it takes longer
What happens during an exchange rate crisis
Expectations about a devaluation forces the government to either give in or increase interest rates drastically as bond holders switch from domestic to foreign bonds as they think the domestic lines are about to be trash
Why is the exchange rate so volatile
Because it moves one for one with expectations about it any time in the future and with the expected change in interest rates for ether country
E=(1+i)…n/(same*)) *E(t+n)
What is expected nominal exchange rate in the medium and long run
The exchange rate required to achieve account balance in the long run. In this time frame nominal exchange rates also become expected exchange rates as interest foes not matter when things move according to potential
What can be scary about a gloating currency
Because financial markets reacts strongly to any future news it makes the exchange rate fluctuations verry strong and frequent
In what situation are independent currencies not perfered
If the central bank cannot be trusted or if the country’s are heavily integrated
What are the circumstances when a common currency is justified, optimal currency area
They beed to face the same shocks so as they would have the same monetary policy anyway or they have to shift their variables in another way like controlling prices or simply moving factors like workers in the eu
What is an example where pegging is done because the central bank cannot be trusted
After hyperinflation
What is a hard board
A regime when the central bank has large foreign cash reserves that can be exchanged for the domestic at a fixed rate
What are examples of hard pegs
Dollarization, currency boards and other symbolic or technical means of reversing the peg
