PEGGED CURRENCY AND ASIAN CRISIS

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Contemporary Exchange rate system• The Fixed Rate System has governments

buying and selling currency reserves when exchange rates differ from stated par values. Pure fixed systems are rare. Current examples: Cuba, North Korea, Malaysia.

• The Crawling Peg System has governments managing exchange rates within a percentage range from par. A peg can be made to other currencies (like a dollar) or to market baskets of currencies.

Contemporary Exchange rate systemThe Target Zone Arrangement, is a managed

multilateral float system arranged by nations (like the G7) who have common interests and goals. The European Monetary System is an example of this. This is managed by the European Central Bank.

The Managed Float System, known as the dirty float, is managed by governments to preserve orderly exchange and eliminate excess volatility. Central banks manage currency valuations by buying and selling currencies, and altering balances of payments, exchange reserves, and black market rates.

Independent Float Systems, allow clean floating and full flexibility.

The Asian Financial Crisis

• Crises can occur in international financial markets. These impact business operations dramatically because they impact the availability and cost of financial instruments, while introducing political risk, and making it more difficult to plan, organize, lead, and control business operations globally

Asian Crisis Perspectives: Financial• Crisis came from financial sector

weakness and market failure. Specifically, the maintenance of pegged exchange rates became too expensive and forced rising deficits in Asian countries.

• Loan defaults increased and governments were left with no recourse but to float their currencies, causing massive devaluation.

Asian Crisis Perspectives: Financial

Asian crisis perspective• Wide swings in the dollar/yen

exchange rate contributed to the buildup in the crisis through shifts in international competitiveness

• International investors had underestimated the risks as they searched for higher yields at a time when investment opportunities appeared less profitable in Europe and Japan

Lessons learnt

• The liberalization of domestic financial systems should precede—or at least accompany—the opening up to foreign investors. A robust financial system supported by effective regulation and supervision of financial institutions.

• Prudential limits on foreign currency exposure in the financial system are also essential.