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Chapter 20

Government Policies toward the Foreign Exchange Market

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. The second half examines the actual policies that governments have adopted during the past 150 years. Government policies toward the foreign exchange market exist for a variety of reasons, including to reduce variability in exchange rates, to keep the exchange value of its currency either high or low, or to raise national pride in a steady or strong currency.

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Slide30
知识点8
案例4
习题60

Knowledge Points

知识点

manual

Two Aspects: Rate Flexibility and Restrictions on Use

Government policies toward the foreign exchange market exist for a variety of reasons, including to reduce variability in exchange rates, to keep the exchange value of its currency either high or low, or to raise national pride in a steady or strong currency. The two major aspects of government policies toward the foreign exchange market are policies toward the exchange rate itself and policies that permit or restrict access to the foreign exchange market.

  • Policy toward the level and variability of the (nominal spot) exchange rate. In simple terms, it is the choice between a floating exchange rate and a fixed exchange rate.
  • Restrictions (if any) on the use of the foreign exchange market. These restrictions are generally called
  • exchange controls
manual

Floating Exchange Rate

The basic choice that a government faces with its policy toward the exchange rate itself is between an exchange rate that is floating and one that is set or fixed by the government. In the polar case of a clean float the government permits private market demand and supply to set the exchange rate with no direct involvement by government officials.

  • Policy toward the level and variability of the (nominal spot) exchange rate. In simple terms, it is the choice between a floating exchange rate and a fixed exchange rate.
  • Restrictions (if any) on the use of the foreign exchange market. These restrictions are generally called
  • exchange controls
manual

Fixed Exchange Rate

The basic choice that a government faces with its policy toward the exchange rate itself is between an exchange rate that is floating and one that is set or fixed by the government. In the polar case of a clean float the government permits private market demand and supply to set the exchange rate with no direct involvement by government officials.

  • Policy toward the level and variability of the (nominal spot) exchange rate. In simple terms, it is the choice between a floating exchange rate and a fixed exchange rate.
  • Restrictions (if any) on the use of the foreign exchange market. These restrictions are generally called
  • exchange controls
manual

Defense Through Official Intervention

The first line of defense is often official intervention. 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. The intervention is financing the country's official settlements balance deficit and preventing this excess private demand for foreign currency from driving the foreign currency's value above the top of the band.

  • Defending against depreciation
  • Defending against appreciation
  • Temporary disequilibrium
manual

Exchange Controls

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. The second half examines the actual policies that governments have adopted during the past 150 years.

  • Policy toward the level and variability of the (nominal spot) exchange rate. In simple terms, it is the choice between a floating exchange rate and a fixed exchange rate.
  • Restrictions (if any) on the use of the foreign exchange market. These restrictions are generally called
  • exchange controls
manual

International Currency Experience

11.Key features of the interwar currency experience were that exchange rates were highly variable, especially during the first years after World War I and during the early 1930s. Speculation seemed to add to the instability, and governments sometimes appeared to manipulate the exchange-rate values of their currencies to gain competitive advantage.

  • Gold Standard, 1870-1914
  • Gold value of each currency was fixed.
  • Britain was the central country.
manual

What to Fix To?

If the government chooses to impose a fixed exchange rate, there are three additional choices that the government faces. First, what to fix to? Answers could include gold (or some other commodity), the U.S. dollar or some other single currency, or a basket of currencies. (With the exception of the specific examination of the gold standard, subsequent discussion assumes that a fix is to one or several foreign currencies.) Second, when to change the fixed exchange rate?

  • A fixed rate means that the value of a country’s currency is fixed to something else, but what is this something else?
  • A commodity (e.g. gold)?
  • A single currency (e.g. dollar or euro)?
manual

When to Change the Fixed Rate?

If the government chooses to impose a fixed exchange rate, there are three additional choices that the government faces. First, what to fix to? Answers could include gold (or some other commodity), the U.S. dollar or some other single currency, or a basket of currencies. (With the exception of the specific examination of the gold standard, subsequent discussion assumes that a fix is to one or several foreign currencies.) Second, when to change the fixed exchange rate?

  • Never
  • : Permanently fixed rate. Not credible.
  • Occasionally

Cases

案例与情境

A compromise between the United States and Britain led to an ...

A compromise between the United States and Britain led to an agreement in 1944 that established the Bretton Woods System, a regime of adjustable pegged exchange rates. While this system looked successful for almost two decades, it also had two defects. One was that it set up one-way speculative gambles when currencies were in trouble.

查看原始摘录

A compromise between the United States and Britain led to an agreement in 1944 that established the Bretton Woods System, a regime of adjustable pegged exchange rates. While this system looked successful for almost two decades, it also had two defects. One was that it set up one-way speculative gambles when currencies were in trouble. The second arose from the role of the U.S. dollar in the system. As the system developed, other countries pegged their currencies to the dollar, and the U. S. government was committed to buy or sell gold for dollars with other central banks. Continuing U.S. payments deficits in the 1960s led some other countries to amass large holdings of U.S. dollar-denominated assets as official reserves. Confidence that the U.S. government could continue to honor the official gold price dwindled. The U.S. government was unwilling to contract the U.S. economy to reduce th

The U.S. government probably could have maintained the system, at least ...

The U.S. government probably could have maintained the system, at least for longer than it actually lasted, if it had been willing to change its domestic policies, tightening up on government spending to contract the economy and cool off its inflation. The United States instead reacted by changing the rules of Bretton Woods, severing the link between the private gold market and the official gold price in 1968 and suspending gold convertibility and forcing other countries to revalue their currencies in 1971.

查看原始摘录

The U.S. government probably could have maintained the system, at least for longer than it actually lasted, if it had been willing to change its domestic policies, tightening up on government spending to contract the economy and cool off its inflation. The United States instead reacted by changing the rules of Bretton Woods, severing the link between the private gold market and the official gold price in 1968 and suspending gold convertibility and forcing other countries to revalue their currencies in 1971. An agreement in late 1971 reestablished fixed exchange rates after a short period in which some currencies floated, but most major currencies shifted to floating in 1973.

The current system is often described as a system of managed ...

The current system is often described as a system of managed floating exchange rates, and the trend is generally in this direction. But there is also much official resistance to market-driven exchange rates. Some of the resistance is seen in the active management of floating exchange rates. More dramatically, the countries of the European Union have attempted to create a zone of stability in Europe, first by using the snake within the tunnel, then through the Exchange Rate Mechanism of the European Monetary System, and now with European Monetary Union and the euro.

查看原始摘录

The current system is often described as a system of managed floating exchange rates, and the trend is generally in this direction. But there is also much official resistance to market-driven exchange rates. Some of the resistance is seen in the active management of floating exchange rates. More dramatically, the countries of the European Union have attempted to create a zone of stability in Europe, first by using the snake within the tunnel, then through the Exchange Rate Mechanism of the European Monetary System, and now with European Monetary Union and the euro. A goodly number of countries maintain fixed or heavily managed exchange rates. However, the series of exchange rate crises during the 1990s and early 2000s show how difficult it is for a government to defend a fixed or a heavily managed exchange rate in the face of wide swings in speculative international financial flows.

The actual current system is in many ways a nonsystem—countries can ...

The actual current system is in many ways a nonsystem—countries can choose almost any exchange rate policies that they want, and there is much variety. Two major blocs of currencies exist—one is the U.S. dollar and the currencies fixed to it, and the other is the countries adopting the euro and other currencies fixed to the euro.

查看原始摘录

The actual current system is in many ways a nonsystem—countries can choose almost any exchange rate policies that they want, and there is much variety. Two major blocs of currencies exist—one is the U.S. dollar and the currencies fixed to it, and the other is the countries adopting the euro and other currencies fixed to the euro. A growing number of countries have floating exchange rates for their currencies, with a greater or lesser degree of “management.” Yet other countries use a fixed exchange rate to another currency, a fixed exchange rate to a basket of currencies, or a crawling pegged exchange rate. A few countries are “dollarized”—each simply uses the currency of some other country as its own. Tips

Exercises

习题与答案

题目 1Two Aspects: Rate Flexibility and Restrictions on Use

________ are in place when a country's government places restrictions on the conversion of the domestic currency into foreign currency or vice versa.

  • A) Exchange controls
  • B) Capital controls
  • C) Official interventions
  • D) Adjustable pegs

正确答案：A | Exchange controls

难度：1 Easy Bloom's：Remember

题目 2Two Aspects: Rate Flexibility and Restrictions on Use

Which of the following are in place when government imposes limits on or requires approvals for payments related to some (or all) international financial investment activities?

  • A) Exchange controls
  • B) Capital controls
  • C) Official interventions
  • D) Adjustable pegs

正确答案：B | Capital controls

难度：1 Easy Bloom's：Remember

题目 3Floating Exchange Rate

With a(n) ________, the government allows the market to determine the exchange rate of a currency.

  • A) adjustable peg
  • B) dirty float
  • C) crawling peg
  • D) clean float

正确答案：D | clean float

难度：1 Easy Bloom's：Remember

题目 4Floating Exchange Rate

Under which of the following policies does the government enter the foreign exchange market and buy or sell foreign currency to influence the exchange rate of the domestic currency?

  • A) Exchange controls
  • B) Capital controls
  • C) Official intervention
  • D) Devaluation or revaluation

正确答案：C | Official intervention

难度：1 Easy Bloom's：Remember

题目 5Floating Exchange Rate

Which of the following terms describes an exchange rate regime in which the government intervenes in the foreign exchange market to influence the market-determined exchange rate?

  • A) Fully convertible
  • B) Currency control
  • C) Managed float
  • D) Clean float

正确答案：C | Managed float

难度：1 Easy Bloom's：Remember

题目 6Fixed Exchange Rate

Which of the following statements is true?

  • A) The special drawing right (SDR) is a basket of currencies made up of U.S. dollars, euros, and Japanese yen.
  • B) Today, South Africa is a country that has a currency fixed to gold.
  • C) Currencies whose prices are fixed to the same commodity would have currency exchange rates that are also fixed.
  • D) A country maintains a cleanly floating exchange rate value to neutralize the international value of its currency.

正确答案：C | Currencies whose prices are fixed to the same commodity would have currency exchange rates that are also fixed.

难度：2 Medium Bloom's：Understand

题目 7Fixed Exchange Rate

Which of the following terms is used to describe an exchange rate regime in which the rate is fixed to a currency or basket of currencies?

  • A) Exchange controls
  • B) Pegged exchange rate
  • C) Managed float
  • D) Fully convertible

正确答案：B | Pegged exchange rate

难度：1 Easy Bloom's：Remember

题目 8Fixed Exchange Rate

An exchange rate regime in which the government may change the fixed rate in the face of a significant disequilibrium in the country's international position is called a(n)

  • A) crawling pegged exchange rate.
  • B) currency board.
  • C) adjustable peg.
  • D) managed float.

正确答案：C | adjustable peg.

难度：1 Easy Bloom's：Remember

题目 9Fixed Exchange Rate

If a country with a relatively high inflation rate maintains a pegged exchange rate against the currency of a relatively low inflation country

  • A) its currency will depreciate.
  • B) its exports will become more competitive in the international market.
  • C) its currency will sell at a discount.
  • D) its exports will become less competitive in the international market.

正确答案：D | its exports will become less competitive in the international market.

难度：1 Easy Bloom's：Remember

题目 10Fixed Exchange Rate

For a country which has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange-rate regimes is the best choice?

  • A) Fully fixed exchange rate
  • B) Adjustable peg
  • C) Crawling peg
  • D) Fully convertible currency

正确答案：C | Crawling peg

难度：2 Medium Bloom's：Understand

题目 11Fixed Exchange Rate

Which of the following mechanisms would not be used by a country to defend a fixed exchange rate?

  • A) The government can buy or sell foreign currency to influence the actual exchange rate.
  • B) The government can threaten to shift to a floating exchange rate.
  • C) The government can impose a form of exchange control.
  • D) The government can alter domestic interest rates to influence short-term international capital flows.

正确答案：B | The government can threaten to shift to a floating exchange rate.

难度：2 Medium Bloom's：Understand

题目 12Defense Through Official Intervention

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar. Which of the following interventions will stem the pressures for depreciation of the pound?

  • A) The government of Britain should sell pounds and buy dollars.
  • B) The government of Britain should do nothing, as a fixed rate cannot change.
  • C) The government of Britain should buy pounds and sell dollars.
  • D) The government of Britain should increase the country's money supply.

正确答案：C | The government of Britain should buy pounds and sell dollars.

难度：2 Medium Bloom's：Understand

Manual Preview

教师手册摘录

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. The second half examines the actual policies that governments have adopted during the past 150 years.

Government policies toward the foreign exchange market exist for a variety of reasons, including to reduce variability in exchange rates, to keep the exchange value of its currency either high or low, or to raise national pride in a steady or strong currency. The two major aspects of government policies toward the foreign exchange market are policies toward the exchange rate itself and policies that permit or restrict access to the foreign exchange market. Government-imposed restrictions on the use of the foreign exchange market are called exchange controls, which may be broad-based or may be applied only to some types of transactions (e.g., capital controls).

The basic choice that a government faces with its policy toward the exchange rate itself is between an exchange rate that is floating and one that is set or fixed by the government. In the polar case of a clean float the government permits private market demand and supply to set the exchange rate with no direct involvement by government officials. In a managed float or dirty float the government officials do intervene at times to try to influence the exchange rate, which otherwise is driven by private demand and supply.

Slide Outline

课件线索

  • Two Aspects: Rate Flexibility and Restrictions on Use
  • Floating Exchange Rate
  • Fixed Exchange Rate
  • What to Fix To?
  • When to Change the Fixed Rate?
  • Defending a Fixed Exchange Rate
  • Defense Through Official Intervention
  • Intervention to Defend a Fixed Rate: Preventing Depreciation of the Country’s Currency
  • Defending Against Depreciation
  • Defending Against Appreciation
  • Intervention to Defend a Fixed Rate: Preventing Appreciation of the Country’s Currency
  • Temporary Disequilibrium

NextLab Bridge

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Mundell Trilemma Lab

将《Government Policies toward the Foreign Exchange Market》对应的理论或政策机制放到贸易分析实验室中做交互式验证。

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