The Gold Standard &

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EXCHANGE RATE REGIMES

By: PAAVNI SHARMA

ROLL NO. 15069


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An exchange rate is the value of one currency in terms ofanother.

Example : If the U.S. exchange rate for the Canadian

Dollar is $1.60, this means that 1 American Dollar can beexchanged for 1.6 Canadian dollars.

Units of home currency for one unit of foreign currency or

units of foreign currency for one unit of home currency.


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EXCHANGE RATE REGIME

Exchange rate regime is defined as the mechanism, procedures and

institutional framework for determining exchange rates at a point in time

and changes in them over time , including factors which induce the changes.

Factors affecting exchange rate:

1) Inflation2) Interest rates

3) Speculation

4) Change in competitiveness

5) Relative strength of other currencies6) Government debt

7) Government Intervention

8) Economic growth/recession

9) Balance of payments


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CATEGORIES OF EXCHANGE RATE

ARRANGEMENTS

EXCHANGE RATEARRANGEMENTS

HARD PEGS SOFT PEGSFLOATINGREGIMES

OTHERMANAGED

Exchange rate regime Conventional fixed pegged Floatingwith no separate tender Pegged with horizontal bands Free floatingCurrency board Crawling PegArrangement


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EXCHANGE RATE REGIMES(NUMBER OF

COUNTRIES)Source: Annual report on Exchange Arrangements and Exchange Restrictions 2013,IMF

No separate

legal tender,13

Currencyboard, 12

Conventional

peg, 45

Stabilisedarrangement,

19

Crawling peg,2

Crawl-likearrangement,

15

Pegged withhorizontalbands, 1

Othermanaged

arrangement,19

Floating, 35

Free floating,30


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1. EXCHANGE ARRANGEMENTS WITH NO

SEPARATE LEGAL TENDER

A country either adopts the currency of another countryas its legal tender or a group of countries share acommon currency.

A country adopting such a regime cannot have cannothave an independent monetary policy.

Examples:

a) Ecuador and Panama have adopted the US dollar astheir legal tender.

b) European Union has Euro as its currencyc) Countries belonging to the Eastern Caribbean

Union(ECCU) East Caribbean dollar which in turn ispegged to the US dollar in a currency boardarrangement


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2. CURRENCY BOARD ARRANGEMENTS

Legislative commitment to exchange the domesticcurrency against a specified foreign currency at a fixedexchange rate coupled with restrictions on the monetaryauthority to ensure that this commitment will behonoured.

The domestic currency is usually fully backed by foreignassets

Example:

The Hong Kong Monetary Authority (HKMA).The HongKong dollar is linked to the U.S. dollar at US$1=HK$7.78since 1983 and US$1=HK$7.75 since 1998.


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Flexibility of monetary policy

The monetary authority maintains the fixed paritythrough 2 ways:

1. Direct intervention (i.e., via sale/purchase offoreign exchange in the market)

2. Indirect intervention (e.g., via aggressive use of

interest rate policy, imposition of foreign exchangeregulations, exercise of moral suasion thatconstrains foreign exchange activity, or throughintervention by other public institutions).


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4. PEGGED EXCHANGE RATES WITHIN

HORIZONTAL BANDS

There is a peg but variation is permitted within widerbands.

The value of the currency is maintained within

certain margins of fluctuation of atleast 1% arounda central rate-or a margin between the maximumand minimum value of the exchange rate thatexceeds2 %

Example: Tonga


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5. CRAWLING PEG

The country (formally or de facto) pegs its currencyto another currency or a basket of currencies but thepeg is periodically adjusted.

The adjustments may be pre announced andaccording to a well specified criterion or discretionaryin response to changes in selective quantitativeindicators such as inflation and other market factors.

Example: Nicaragua and Botswana


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The main key advantages under the crawling pegsystem as opposed to conventional exchange rateregimes are:

1. Avoid economic instability as a result of infrequentand discrete adjustments (fixed exchange rate)

2. Minimize the rate of uncertainty and volatility since

the fluctuation in the exchange rate is kept minimal(floating exchange regime)


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6. FLOATING REGIME

A floating rate is largely market determined, withoutan ascertainable or predictable path for the rate.

Foreign exchange market intervention may be direct

or indirect and serves to moderate the rate ofchange and prevent undue fluctuations in theexchange rate.

Policies targeting a specific level of the exchangerate are incompatible with floating

Example: India, Pakistan, Afghanistan , Mexico


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7. FREE FLOATING

If intervention occurs only exceptionally and aims toaddress disorderly market conditions.

Authorities have provided information or data

confirmation that intervention has been limited to atmost three instances in the previous six months ,each lasting no more than three business days.

Example: Australia, Canada, Japan, US,UK


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1. Which of the following best describes the followingexchange-rate regime? The currency of anothercountry circulates as the sole legal tender or the

member belongs to a monetary or currency union

in which the members of the union share the samelegal tender.

a. currency board arrangements

b. pegged exchange rates within horizontal bandsc. crawling pegs

d. exchange arrangements with no separate legaltender


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2. A monetary regime based on an implicit legislativecommitment to exchange domestic currency for aspecified foreign currency at a fixed exchange rate,combined with restrictions on the issuing authority to

ensure the fulfilment of its legal obligation is bestdescribed as:

a. currency board arrangements.

b. exchange arrangements with no separate legaltender.

c. pegged exchange rates within horizontal bands.

d. independent floating.


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3. Which of the following best describes the followingexchange-rate regime? The value of the currency ismaintained within margins of fluctuation around a

formal or de factor fixed peg that are wider than +/- 1%

around a central rate.

a. exchange arrangements with no separate legaltender

b. pegged exchange rates within horizontal bandsc. currency board arrangements

d. crawling pegs


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4. In which of the following types of exchange-rateregimes is the currency adjusted periodically in smallamounts at a fixed, preannounced rate or in responseto changes in selective quantitative indicators?

a. exchange arrangements with no separate legaltender

b. currency board arrangements

c. crawling pegs

d. pegged exchange rates within horizontal bands


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