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Objectives
To classify international monetary systems
To outline the history of exchange rate arrangements
To outline the pros and cons of fixed and flexible
exchange rates
To examine the Australian exchange rate
arrangements
5-2
Definition
The IMS is the framework of rules, regulations and
conventions that govern the financial relations
among countries
5-3
5-4
Criterias of Classification
Two criteria's
Nature of International reserves held by central bank
Degree of Flexibility of exchange rate
5-5
5-6
5-7
5-8
5-9
5-10
5-11
Crawling peg
The par value of the exchange rate is revised
periodically according to its recent behaviour or
economic indicators such as inflation
5-12
5-13
Managed floating
The exchange rate is flexible, but the central bank
intervenes to limit the frequency and amplitude of
exchange rate fluctuations
5-14
Target zones
Major countries establish a set of mutually consistent
targets for real effective exchange rates
5-15
5-16
5-17
5-18
5-19
5-20
5-21
5-22
5-23
5-24
5-25
5-26
5-27
5-28
5-29
Currency boards
A currency board is an arrangement that is based on
an explicit legislative commitment to exchange the
domestic currency for a specified foreign currency at
a fixed exchange rate, combined with restrictions on
the issuing authority to ensure the fulfillment of its
legal obligation
5-30
5-31
5-32
Crawling peg
Under a crawling peg, the exchange rate is adjusted
periodically at a fixed, pre-announced small rate or in
response to changes in some quantitative indicators
(for example, inflation)
5-33
Crawling bands
This arrangement requires the exchange rate to be
maintained within a certain band around a central
rate that is adjusted periodically at a fixed, preannounced rate or in response to changes in some
indicators
5-34
5-35
Independent floating
Under independent floating the exchange rate is
determined by market forces. Any intervention in the
foreign exchange market aims at curbing exchange
rate volatility
5-36
The EMS
The system started functioning in March 1979 when
the Snake ceased to exist
It is a system of fixed but adjustable exchange rates
as governed by the exchange rate mechanism
(ERM)
5-37
Realignments
The first realignment involving all currencies took
place in March 1983
The period January 1987-September 1992 was
tranquil
5-38
Speculative attacks
In September 1992, speculative attacks forced the
pound and the lira out of the ERM
5-39
5-40
5-41
5-42
5-43
(cont.)
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
5-44
5-45
5-46
(cont.)
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
5-47
5-48
5-49
(cont.)
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
5-50
(cont.)
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
5-51
5-52
A global currency?
Convenience
Loss of exchange rate policy
A small open economy has more to gain from the
convenience
5-53
5-54