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3 - Development > Macroeconomics - ER regimes > Flashcards

Macroeconomics - ER regimes Flashcards

1
Q

what is official ER

A

the monetary authority has full control in determining the ER - a pure policy variable
- the country can choose its nominal ER = can easily make conditionality changed requested by IMF

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2
Q

What is a hard peg

A
  • adopts a foreign currency
  • no independent currency
  • no ER policy = not in control of monetary authorities
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3
Q

what are the 2 types of soft peg

A
  1. conventional
  2. adjusting
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4
Q

what is conventional soft peg

A
  • countries peg their currency to a major currency
  • no ER policy - restricts MP
  • during crisis can abandon the peg
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5
Q

what is the adjusting soft peg

A
  • ER is pegged to a target band rate for a single currency
  • ER can move within a range
  • limited policy options
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6
Q

what are the 2 types of floating regimes

A
  1. freely floating
  2. managed float
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7
Q

what is freely floating ER

A
  • ER is market determined
  • ER is not a policy variable
  • can use IRs to set the rate
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8
Q

what is managed float ER

A
  • monetary authorities intervene if the rate goes outside some target range
  • CB manages movement of ER
  • ER is an instrument for macroeconomic management
  • used to reach inflation target
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9
Q

what happened to official ER why did they change to fixed or flexible

A
  • prior to 1990s - most DCs had official ERs = could change the rate whenever they wanted
  • there would be multiple different ERs for exports, imports, tourists = generate a large black market premium
  • typically Official ERs would be overvalued
  • from 1980s IMF promoted liberalisation to fixed or flexible ER
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10
Q

what is the balance of payments

A

capital account + current account

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11
Q

on the current account (trade) side what is supply and demand

A

imports = demand for forex $
exports = demand for LCU + supply of forex

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12
Q

under what conditions is devaluation required to restore equilibrium

current account

A

when imports > exports
demand for $ > supply $

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13
Q

what are the effects of devaluation
current

increase in E

A
  1. imports are more expensive
  2. increases competitiveness of economy
  3. exporters receive more LCU per unit of exports - benefit from higher prices
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14
Q

on the capital account (inflows/outflow) side what is supply and demand

A

inflows = supply of $ (aid, FDI, borrowing)
outflows = demand for $ (debt servicing)

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15
Q

under what conditions is appreciation required to restore equilibrium

capital account

A

imports > exports
supply > demand

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16
Q

what are the effects of appreciation
capital

decrease in E

A
  • bad for tradeable sector - reduced competitiveness + exporters harmed
  • good for investors - their profits/assets convert to more $ and reduces cost of debt servicing
17
Q

what are the effects of depreciation
capital

increase in E

A
  • bad for current investors - value of assets generates fewer $
  • good for new investors - can buy more LCU for each $
18
Q

what happens when there is a current account deficit

demand for $ > supply of $

A
  • shortfall met by capital inflows
  • aid covers the deficit
  • or the government can borrow/use reserves or even restrict imports
  • reserves are used to help deficit
19
Q

what happens when reserves deplete

A
  • cant sustain deficit
  • devaluation needed - abandon the ped
20
Q

what is NER (E)

A

the price that equilibriates demand and supply for the balance of payments

21
Q

what is RER

A

relate to relative pirces of tradeables and nontradeables
Pt = tradeable
Pn = non-tradeable

22
Q

what is argument in favour of fixed ER

A

reduce MP discretion by imposing a need to restrict inflation
- supports more stable macroeconomic policy
- limits seignorarage = inflation tax

23
Q

RER equation

A

Pn / Pt

Pn / EPt*

24
Q

what Pt =

A

price of tradeables
- traded goods

25
Q

what Pn

A

nontradeables price
- production costs

26
Q

pt*

A

world price of tradeables

27
Q

how does Pn relate to world prices Pt*

A
  • if Pn is high comapred to gloabl levels = the country is relatively uncompetitive
  • high production costs = not competitive
28
Q

under a floating ER what happens to maintain RER

vs fixed

A
  • E will adjust to maintain RER

fixed
* E cant change

29
Q

what happens if domestic inflation is greater than world inflation

A
  • real appreciation
    RER increases

pn will increase = become less competitive

30
Q

who should you adopt a fixed ER with

A

your major economic partner
trade and capital flows

3 - Development (16 decks)

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