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Department of Economics |
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foreign exchange intervention: central bank engagement in international financial transactions managed float regime (dirty float): exchange rates fluctuate day to day, but central banks attempt to influence their countries’ exchange rates by buying and selling currencies Foreign Exchange Intervention and the Money
Supply international reserves: central bank holdings of assets denominated in a foreign currency A central bank’s purchase of domestic currency and corresponding sale of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base. A central bank’s sale of domestic currency to purchase foreign assets in the foreign exchange market results in an equal rise in its international reserves and the monetary base. unsterilized foreign exchange intervention: intervention where the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base sterilized foreign exchange intervention: foreign exchange intervention with an offsetting open market operations that leaves the monetary base unchanged Unsterilized Intervention An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves, an increase in the money supply, and a depreciation of the domestic currency. See Figure 1 An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a drop in international reserves, a decrease in the money supply, and an appreciation of the domestic currency. Sterilized Intervention |
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balance of payments: bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries current account: shows international transactions that involve currently produced goods and services trade balance: difference between merchandise exports and imports capital account: net receipts from capital transactions official reserve transaction balance: sum of the current account and the capital account Current account + capital account = net change in government international reserves |
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fixed exchange rate regime: value of a currency is pegged relative to the value of one other currency floating exchange rate regime: value of a currency is allowed to fluctuate against all other
currencies Gold Standard gold standard: currency of most countries was convertible directly into gold The Bretton Woods
System Bretton Woods System: international financial agreement that lasted from 1945 to 1971 International Monetary Fund (IMF): created by the Bretton Woods agreement to promote world trade by setting the rules for maintenance of fixed exchange rates and by making loans to countries that were experiencing balance-of-payments difficulties World Bank: provides long-term loans to help developing countries build dams, roads, and other physical capital that would contribute to their economic development World Trade Organization (WTO): monitors rules for the conduct of trade between countries (tariffs and quotas) reserve currency: currency used by other countries to denominate the assets that they held as international reserves How a Fixed Exchange Rate Regime Works See Figure 2 When the domestic currency is overvalued, the central bank must purchase domestic currency to keep the exchange rate fixed, but as a result it loses international reserves. When the domestic currency is undervalued, the central bank must sell domestic currency to keep the exchange rate fixed, but as a result, it gains international reserves. devaluation: par exchange rate is set at a lower level revaluation: par exchange rate is set at a higher level APPLICATION
How Did How the
Bretton Woods System Worked Managed Float special drawing rights (SDRs): paper substitute for gold issued by the IMF European Monetary System ( APPLICATION The Foreign Exchange Crises of September 1992 See Figure 3 balance of payments crisis: crises that lead to large changes in central banks’ holdings of international reserves APPLICATION
Recent Foreign Exchange Crises in Emerging Market Countries: |
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Controls on Capital Outflows Controls on Capital Inflows |
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Should the IMF be an International Lender of Last
Resort? How Should the IMF Operate? |
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Direct Effects of the Foreign Exchange Market on
the Money Supply Balance-of-Payments Considerations Exchange Rate Considerations |
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Advantages
of Exchange-Rate Targeting Disadvantages
of Exchange-Rate Targeting When Is
Exchange-Rate Targeting Desirable for Industrialized Countries? When Is
Exchange-Rate Targeting Desirable for Emerging Countries? Currency
Boards currency board: the domestic currency is backed 100% by a foreign currency Dollarization dollarization: the adoption of a sound currency as a country’s money seignorage: revenue that a government receives by issuing money |
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Disclaimer: pages.slu.edu is a service of Saint Louis University, Saint Louis University does not control, monitor or guarantee the information contained in these sites. For more information » |