Topic 6: Exchange Rate Regimes

Question 1

What are the three kinds of exchange rate regimes?

Answer 1

• Fixed
• Mixed
  
  • closer to fixed, and
  • closer to flexible
• Flexible

Question 2

What is the definition of a flexible / floating system?

Answer 2

No government / government authority intervenes in the forex market

Question 3

What is a fixed exchange rate regime?

Answer 3

Where a government / government authority sets the local currency in relation to another, and stands ready to defend it.

Question 4

How can a fixed exchange rate regime be operated?

Answer 4

• Using Fx reserves (won’t last forever)
• Using domestic fiscal or monetary policy
• Capital controls

Question 5

What kinds of systems are deviations from the flexible system?

Answer 5

Interventions to target a particular level, or eliminate volatility

Question 6

What are some eviations from fixed exchange rate regimes?

Answer 6

1. Crawling Peg
2. Exchange Rate Band

Question 7

What are some arguments and responses in favour of a fixed exchange rate regime?

Answer 7

1. Flexible system is volatile
   
   1. Fixed system against one currency doesn’t eliminate much volatility
   2. When the system breaks it’s very volatile
   3. Better ways to eliminate the problems from volatility
   4. Empirally unproven to increase economic growth / efficiency
2. Eliminates speculation
   
   1. The speculation then turns against the actual system

Question 8

What are some arguments and responses in favour of a flexible exchagne rate system?

Answer 8

1. No BOP deficit from ill set rate
   
   1. has failed to eliminate persistant deficits
2. Policy independence
3. No FX controls needed, which bring with them corruption.