International Economic II. Lecture 05 Government Policies toward the Foreign Exchange Market （ 政府的外汇市场政策 ）. Objectives.
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Government Policies toward the Foreign Exchange Market
The first half of this chapter examines types of government policies toward the foreign exchange market and provides analysis of government intervention and exchange controls. (Part I)
The second half examines the actual policies that governments have adopted during the past 130 years. (Part II)
Concepts and Analysis of the Foreign Exchange Policies
Government’s FX Policies
the Exchange Rate itself (Price)
Policies that permit or restrict access to
the foreign exchange market (Quantity)
Floating Exchange Rate
Fixed Exchange Rate
The government permits private market demand and supply to set the exchange rate with no direct involvement by government officials
The monetary authorities buy or sell foreign currency (in exchange for domestic currency) to alter the configuration of supply and demand, and thus influence the exchange rate.
Thinking about the following Questions:
--Monetary Policy Autonomy
--Exchange Rate as Automatic Stabilization
--Discipline (“Inflation Bias”)
--Destabilizing Speculation and Money Market Disturbances
--Injury to International Trade and Investment
--Uncoordinated Economic Policies
--The illusion of Greater Autonomy
As long as this country maintains a floating exchange rate, the implementation of import restrictions to help one industry will gradually shift jobs from other industries in the economy to the protected industry, with no significant impact on aggregate employment.
--Ideal hedging measure
-- Special Drawling Rights (SDR)
-- A country can create its own basket
If the country's currency is experiencing pressure toward depreciation, the country's monetary authority can defend the fixed rate by entering the foreign exchange market to buy domestic currency and sell foreign currency.
Through intervention, the monetary authority is financing the deficit in its official settlement balance.
--Foreign Exchange Assets
--Reserve Position with the IMF
--Special Drawling Rights
-- Official (Swap Lines)
-- Private (Secret)
By buying domestic currency, the monetary authority is removing domestic money from the economy, which tends to lower the domestic money supply unless the authority separately takes action of sterilization to restore the domestic money back into the economy.
Buying the U.S. dollars and Selling Domestic Currencies
It will result in an official settlements balance surplus
It adds these dollars to its official international reserve holdings (or, if appropriate, repays prior official borrowings of dollars)
This will expand the domestic money supply unless the authority separately takes another action to remove the additional domestic money from the economy.
The length of time for which the intervention must continue.
If the disequilibrium is ongoing or fundamental rather than temporary, then intervention alone is not likely to be able to sustain the fixed exchange rate. Instead, the government must shift to one of the other defenses or devalue.
Speculator or investor’s one-way
facing pressure toward
sell domestic currency
and buy foreign currency
to sell foreign currency
hastening the loss of reserves
official reserves will run low
losing ability to borrow
shift to one of the other three
defenses or surrender (devaluate)
Pressures toward appreciation
buy foreign currency
accumulates large international reserves
--The basic rate of return on this particular form of national wealth tends to be low
--the value of foreign exchange assets will decline if the country eventually must “retreat” by revaluating its own currency.
Exporters are required to turn over all the revenues from foreign buyers to the U.S. government, the government, in turn, givers them $1 for each pound
--Government may allocate the right to buy foreign currency at the low official rate according to more complicated rules rather than public foreign currency auctions
--Efforts to evade the exchange control is predictable
Foreign Exchange Regimes Changes over the past 130 Years
Any questions? Feel free to discuss with me
Remember to prepare Lecture 6
I will be glad to see you next week