Fayis

Dhular hassan
Iqbal
Ginoy
Jazzel jaleel
Jerlitz


An exchange-rate regime is the way an
authority manages its currency in relation to other
currencies and the foreign exchange market. It is
closely related to monetary policy and the two are
generally dependent on many of the same factors.
A double standard in the sense that both gold and
silver were used as money.
Some countries were on the gold standard, some on
the silver standard, some on both.
Both gold and silver were used as international means
of payment and the exchange rates among currencies
were determined by either their gold or silver contents.
Greshams Law implied that it would be the least
valuable metal that would tend to circulate.
Bimetallism: Before 1875
During this period in most major countries:
Gold alone was assured of unrestricted coinage
There was two-way convertibility between gold and
national currencies at a stable ratio.
Gold could be freely exported or imported.
The exchange rate between two countrys
currencies would be determined by their relative
gold contents.
Dollar pegged to gold at U.S.$30 = 1 ounce of gold
British pound pegged to gold at 6 = 1 ounce of gold
Exchange rate determined as:
6 = 1 ounce of gold = $30
1 = $5
Highly stable exchange rates under the classical gold
standard provided an environment that was conducive to
international trade and investment.
Misalignment of exchange rates and international
imbalances of payment were automatically corrected by
the price-specie-flow mechanism.
There are shortcomings:

The supply of newly minted gold is so restricted
that the growth of world trade and investment
can be hampered for the lack of sufficient
monetary reserves.
Even if the world returned to a gold standard,
any national government could abandon the
standard.
Exchange rates fluctuated as countries widely used
predatory depreciations of their currencies as a means
of gaining advantage in the world export market.
Attempts were made to restore the gold standard, but
participants lacked the political will to follow the rules of
the game.
The result for international trade and investment was
profoundly detrimental.
Named for a 1944 meeting of 44 nations at Bretton
Woods, New Hampshire.
The purpose was to design a postwar international
monetary system.
The goal was exchange rate stability without the gold
standard.
The result was the creation of the IMF and the World
Bank.
Under the Bretton woods system, the U>S dollar was
pegged to gold at $ 35 per ounce and other currencies
were pegged to the U.S. dollar.
Each country was responsible for maintaining its
exchange rate within 1% of the adopted par value by
buying or selling foreign reserves as necessary.
The Bretton Wood system was a dollar-based gold
exchange standard.

Flexible Exchange Rate System
Fixed Exchange Rate System
Flexible exchange rates were declared
acceptable to the IMF members.
Central banks were allowed to intervene in the
exchange rate markets to iron out unwarranted
volatilities.
Gold was abandoned as an international reserve
asset.
Non-oil-exporting countries and less-developed
countries were given greater access to IMF
funds.
a unit of domestic currency can buy more
units of foreign currencies
Depreciation
a unit of domestic currency can buy less
units of foreign currencies
demand for X
capital inflow
people expect domestic currency
appreciate

demand for domestic currency

appreciation of domestic currency




demand for imports
capital outflow
people expect domestic currency
depreciate

supply of domestic currency

depreciation of domestic currency

domestic price level

demand for domestic currency

supply of domestic currency

depreciation of domestic currency
domestic interest rate
capital inflow
(demand for domestic currency)

appreciation of domestic currency
assume exports are autonomous

income level
demand for M
(supply of domestic currency )

depreciation of domestic currency
Depreciation will improve the balance of
payments position of a country, provided that the
sum of elasticities of foreign demand for domestic
exports ( Ex) domestic demand for imports ( Em )is
greater than one.
the official exchange rate is altered so that
a unit of the domestic currency can buy
fewer units of foreign currencies
Revaluation
the official exchange rate is altered so that
a unit of the domestic currency can buy
more units of foreign currencies
The gap between official exchange rate and equilibrium
exchange rate will be reduced.

Exports become more competitive in the international
market.

Imports become more expensive.
The gap between official exchange rate and equilibrium
exchange rate will be reduced.

Exports become less competitive in the international
market.

Imports become cheaper.
BOP deficit to support the exchange
rate, govt S of foreign
currency ( D for domestic
currency)


prohibit or restrict the purchase of foreign
exchange

black market will emerge
Flexible exchange rate

exchange rate is
determined by
demand for and
supply of foreign
currency
Fixed exchange rate

the government fixes
the foreign exchange
rate by buying and
selling of foreign
exchange
Flexible exchange rate

depreciation or
appreciation of a
currency is
determined by the
market forces

speculation in
foreign exchange
market is common
Fixed exchange rate

devaluation or
revaluation of a
currency is
determined by the
government

speculation occurs
when there is rumour
about the change in
government policy
Flexible exchange rate

self-adjusting
mechanism operates
to eliminate external
disequilibrium by
change in foreign
exchange rate
Fixed exchange rate

self-adjusting
mechanism operates
through the change
in money supply,
domestic interest
rate and domestic
price

a currency will not be over-valued or under-valued
Balance of payments deficit or surplus will be corrected
automatically through market forces
lead to an efficient allocation of resources
no policy conflict
enables a country to pursue an independent economic
policy
minimize outside influences on the domestic economy as
there is no imported inflation or deflation
there is no need for central banks to keep official reserves
in order to intervene in the foreign exchange market
increase business uncertainties and reduce
volume of trade

Such uncertainties can be reduced or eliminated
by forward market
there are also uncertainties under the fixed
exchange rate system
speculative transactions are self-fulfilling



increase currency speculation and it is
therefore destabilizing
speculation can be stabilizing
one-way option speculation