Thomas Alejandro Manzano Pérez

UC3M
INTERNATIONAL
ECONOMICS

PROBLEM SET 10

Currency Crisis (Part B)

1. Which are the main differences between Fixed ER, Adjustable Peg, Crawling
Pegs, Float Within Boundaries, and a Crawling Peg Within Boundaries.

R= a. Fixed exchange rate regime: is a type of exchange rate regime in which a currency's
value is
fixed or pegged by a monetary authority against the value of another currency, a basket of
other
currencies, or another measure of value, such as gold.
b. Adjustable peg: an adjustable peg exchange rate is a system where a currency is fixed to a
certain level against another strong currency such as the dollar or euro. usually, the peg
involves
a degree of flexibility of 2% against a certain level. however, if the exchange rate fluctuates by
more than the agreed level, the central bank needs to intervene to maintain the target
exchange
rate peg.
c. Crawling pegs: a crawling peg is a system of exchange rate adjustments in which a currency
with a fixed exchange rate is allowed to fluctuate within a band of rates. the par value of the
stated currency and the band of rates may also be adjusted frequently, particularly in times of
high exchange rate volatility. crawling pegs are often used to control currency moves when
there is a threat of devaluation due to factors such as inflation or economic instability.
d. Float within boundaries: it is a float exchange regime where nominal exchange rate changes
depending on market forces, but without surpassing limits, that are called "target zone".
nominal
exchange rate can increase or decrease as it determined by demand and supply, as long as the
percentage is not higher.
e. Crawling peg within boundaries: the same that happens with float within boundaries
exchange regimes, nominal exchange rate can fluctuate within two fixed band or what it is the
same, limits. those bands fix depending on the inflation
a. Fixed exchange rate regime: is a type of exchange rate regime in which a currency's value is
fixed or pegged by a monetary authority against the value of another currency, a basket of
other
currencies, or another measure of value, such as gold.
b. Adjustable peg: an adjustable peg exchange rate is a system where a currency is fixed to a
certain level against another strong currency such as the dollar or euro. usually, the peg
involves
a degree of flexibility of 2% against a certain level. however, if the exchange rate fluctuates by
more than the agreed level, the central bank needs to intervene to maintain the target
exchange
rate peg.
c. Crawling pegs: a crawling peg is a system of exchange rate adjustments in which a currency
with a fixed exchange rate is allowed to fluctuate within a band of rates. the par value of the
stated currency and the band of rates may also be adjusted frequently, particularly in times of
high exchange rate volatility. crawling pegs are often used to control currency moves when
there is a threat of devaluation due to factors such as inflation or economic instability.
d. Float within boundaries: it is a float exchange regime where nominal exchange rate changes
depending on market forces, but without surpassing limits, that are called "target zone".
nominal
exchange rate can increase or decrease as it determined by demand and supply, as long as the
percentage is not higher.
e. Crawling peg within boundaries: the same that happens with float within boundaries
exchange regimes, nominal exchange rate can fluctuate within two fixed band or what it is the
same, limits. those bands fix depending on the inflation
a. Fixed exchange rate regime: is a type of exchange rate regime in which a currency's value is
fixed or pegged by a monetary authority against the value of another currency, a basket of
other
currencies, or another measure of value, such as gold.
b. Adjustable peg: an adjustable peg exchange rate is a system where a currency is fixed to a
certain level against another strong currency such as the dollar or euro. usually, the peg
involves
a degree of flexibility of 2% against a certain level. however, if the exchange rate fluctuates by
more than the agreed level, the central bank needs to intervene to maintain the target
exchange
rate peg.
c. Crawling pegs: a crawling peg is a system of exchange rate adjustments in which a currency
with a fixed exchange rate is allowed to fluctuate within a band of rates. the par value of the
stated currency and the band of rates may also be adjusted frequently, particularly in times of
high exchange rate volatility. crawling pegs are often used to control currency moves when
there is a threat of devaluation due to factors such as inflation or economic instability.
d. Float within boundaries: it is a float exchange regime where nominal exchange rate changes
depending on market forces, but without surpassing limits, that are called "target zone".
nominal
exchange rate can increase or decrease as it determined by demand and supply, as long as the
percentage is not higher.
e. Crawling peg within boundaries: the same that happens with float within boundaries
exchange regimes, nominal exchange rate can fluctuate within two fixed band or what it is the
same, limits. those bands fix depending on the inflation
I. R= Fixed exchange rate regime: is a type of exchange rate regime in which a
currency's value is fixed or pegged by a monetary authority against the
value of another currency, a basket of other currencies, or another measure
of value, such as gold.
II. Adjustable peg: an adjustable peg exchange rate is a system where a
 currency is fixed to a certain level against another strong currency such as
the dollar or euro. usually, the peg involves a degree of flexibility of 2%
against a certain level. however, if the exchange rate fluctuates by more
than the agreed level, the central bank needs to intervene to maintain the
target exchange rate peg.
III. Crawling pegs: a crawling peg is a system of exchange rate adjustments in
which a currency with a fixed exchange rate is allowed to fluctuate within a
band of rates. the par value of the stated currency and the band of rates
may also be adjusted frequently, particularly in times of high exchange rate
volatility. crawling pegs are often used to control currency moves when
there is a threat of devaluation due to factors such as inflation or economic
instability.
IV. Float within boundaries: it is a float exchange regime where nominal
exchange rate changes depending on market forces, but without surpassing
limits, that are called "target zone". nominal exchange rate can increase or
decrease as it determined by demand and supply, as long as the percentage
is not higher.
V. Crawling peg within boundaries: the same that happens with float within
boundaries exchange regimes, nominal exchange rate can fluctuate within
two fixed band or what it is the same, limits. those bands fix depending on
the inflation.

2. i) Which are the advantages of a Crawling Peg over an Adjustable Peg. ii) At
which rate will usually a crawling peg increase? iii) Is a crawling peg more de-
fendable than a Fixed ER?

I. R= It avoids economic instability as a result of infrequent and discrete

adjustments (fixed exchange rate) and it minimizes the rate of uncertainty
and volatility since the fluctuation in the exchange rate is kept minimal
(floating exchange regime).
II. They increase in the same percentage inflation does.
III. Yes, because it can control devaluation and appreciation of the currency in
a more efficient way and therefore, it can be used as a tool to promote or to
default trade. on the contrary, with fixed exchange rate regimes is not
possible to control appreciation or devaluation of the currency.

3. i) Why sometimes some countries choose an ER with a crawling peg within

bands, where the width of the band increases thru time? ii) Is a currency crisis
feasible under a crawling peg within bands?

R= Using a crawling peg with bonds, a country is able to control the appreciation
or depreciation of its own currency. So, bands will adjust to the conditions of the
currency. This country then will have monetary independence and can reduce the
number of speculators attacks, but it will have a lower risk premium.

4. i) Explain the difference between a dollarization process and a currency board.

ii) Which is the main threat to both regimes? iii) Under a dollarization, does
monetary policy no longer exists (i.e., Central Bank could take a long vacation)?
R= Dollarization consists in a country adopting a foreign currency as "the domestic
currency, while the currency board is the role of the Central Bank when it exchanges
domestic currency for foreign reserves at fixed rate of exchange.
The threat for dollarization is the loss of monetary policy, and the threat for the
currency board is that there is no possibility for producing fiat money without an
increase in Forex exchange market. They cannot also issue liquidity in domestic
banks.
To finish, I would say that is not true that under dollarization monetary policy does
not exist anymore, but it is that the country loses a bit of monetary policy
independence because he is not able to control the monetary base, but" the thin he
can do is to reduce the cash coefficient in order to control de quantity of currency in
the economy.