This website uses cookies to ensure you have the best experience. Learn more

Exchange Rate Policy And The Central Bank

1069 words - 5 pages

This paper will discuss the second part of chapter 19, The Exchange Rate Policy and The Central Bank. The main points I will be discussing are sterilized intervention, fixed exchange rate, speculative attack, and dollarization.
Sterilized Intervention
Sterilized intervention is when a central bank purchases or sells foreign currency to influence the exchange value without having an effect on the monetary base. It becomes un-sterilized when the monetary base changes. There are two transactions within sterilized intervention. For example, the federal reserves of New York sells 1.34 billion USD in 1.5 billion euros, therefore the Euro reserves are 1.34 billion USD, this is ...view middle of the document...

The article, Investor’s List: Countries with Fixed Currency Exchange Rates compiles a list of countries with a fixed exchange rate. Shalifay says, “On the other hand, they are susceptible to large one-off moves and de-peg risk. Investors in Venezuela experienced this first hand last week when the country devalued its currency by 32%, from 4.3 VEB to 6.3 VEB per USD” (Shalifay).The currency fixing its exchange rate is forced to depreciate its value, creating a problem of having to create more currency and using more of its currency because of the higher fixed rate to 1 USD. The country also has to adapt to the other countries interest-rate policy.
Speculative Attack
Speculative attack is a crisis where financial participants believe the government will be unable to maintain its fixed exchange rate, so they have to sell the currency, forcing a devaluation of the currency. There are three main causes of a speculative attack. The first involves fiscal policy and politicians getting involved, if investors believed government spending increases inflation the investors will stop believing officials can maintain the fixed exchange rate so they will no longer invest, which could cause serious problems in the economy and government spending. If a country’s banking system isn’t stable, a central bank may be forced to relax monetary policy to avoid a financial crisis. Lastly a speculative attack can also happen at any time, whether the economy is stable or not.
An example of a speculative attack is what occurred with the British pound. George Soros saw that the British government was under pressure with the British pound and that it might depreciate. The Article, 20 years of ‘Black Wednesday’: How George Soros toppled the Bank of England, describes how George Soros took the risk and how he traded the British pound for other currencies in Europe, he speculated and attacked. The bank of England had to do something but interest rates kept falling, there was nothing else they could do, and “The Bank then raised interest rates from 10 to 12 percent, in an attempt to lure investors into buying pounds and stabilizing the currency. A few hours later, the Bank had to announce interest rates of 15 percent.” The British...

Find Another Essay On Exchange rate policy and the central bank

Bonds from Spain and Italy and the European Central Bank

641 words - 3 pages The European Central Bank (ECB) has engaged in a form of monetary policy in which it buys bonds from the Spanish and Italian Governments. Monetary policy is a central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth. There are two types of monetary policy; expansionary and contractionary. This article focuses on expansionary monetary policy

Factors Influencing The Exchange Rate Essay

649 words - 3 pages foreigners to buy. 3. Foreign currency policy Market exchange rate is set through the mechanism of supply and demand for the currency. Also, this depends on a certain amount of faith in the currency. 4. Real Interest rate If the country has a high interest rate, then it attracts lenders by offering higher return relative to other countries. Thus, higher interest rates attract foreign capital and cause the exchange rate to rise since demand for

Global Financing and Exchange Rate Mechanisms - The Big Mac Index

1265 words - 5 pages Global Financing and Exchange Rate Mechanisms 1 Global Financing and Exchange Rate MechanismsGlobal financing and exchange rates have become an important issue for global business. Extreme increases in the price of oil and other commodities and inflation has led to significant exchange rate risks in today's global markets. The following will analyze purchasing power parity and the "Big Mac Index", explain how purchasing power parity and the

Global Financing and Exchange Rate Mechanisms

999 words - 4 pages governments." (Europa, 2006, para. 6) The Maastricht Treaty had created the European Union; this turned European market into a large economic power, acting in world trade as a single unit. From 1992, the single market became an economic and monetary union and introduced a single European currency, euro, which managed by a European Central Bank (Europa, 2006)The euro became official currency with eleven participating countries on January 1, 1999

Global Financing and Exchange Rate Mechanisms

1016 words - 4 pages Global Financing and Exchange Rate Mechanisms Global Financing and Exchange Rate MechanismsJoseph RehmanApril 19, 2010University of PhoenixMGT 488Global Financing and Exchange Rate MechanismsIntroductionIn this paper we will discuss hard and soft currencies. A currency is something that is exchanged for a good or a service. Most times this can be in the form of a paper bills and coins. The must have a monetary value, which that can either be a

Global Financing and Exchange Rate Mechanisms Paper

887 words - 4 pages main global hard currencies are the U.S. dollar, Swiss franc, Deutschemark, and Japanese yen. Each of the previously listed currencies is backed by a gold reserve, making them a stable standard of exchange.Soft currency is a "currency from a country that is not economically and politically stable, or in which there is not widespread confidence in the exchange rate. The governments of such countries set an unrealistically high exchange rate, and

The Central Bank or The Fed

1241 words - 5 pages bank oversees the commercial banks, where the central banks ensures that the financial system provides citizens confidence in their soundness. The objectives of the central banks are to provide low, stable inflation, high economic growth, stable financial markets, interest rate stability and exchange rate stability. Objectives of the Central Banks Inflation in an economy is much more desirable when it is low and stable. When there is a high

The Independence Of the Chinese Central Bank

1852 words - 7 pages stipulations. It makes the central bank depend on administration and lack extensive representation. No problem it will cause that the policy scheme represents strong government volition. 2.3 Lacking the independence of function “When the People's Bank of China make determinations on the supply level of annual currency; the interest rate; the exchange rate and other important items which the State Council stipulates, it should get the approval

Global Financing and Exchange Rate Mechanisms

749 words - 3 pages in part because of the political or economic uncertainty within soft currencies country of origin. (, 2009) Investopedia says the governments of developing countries will often set unrealistically high exchange rates by "Pegging" or attaching their countries currencies exchange rate to that of another country such as the United States.The U.S. dollar along with the British pound are good examples of a hard currency. Hard currencies

Global Financing and Exchange Rate Mechanisms - 1174 words

1174 words - 5 pages The existence of discriminatory regulatory policy by governments is perhaps the largest single barrier to international trade in services, and can have an adverse impact on the ability of foreign entities to provide services in any country. Barriers to doing business overseas can include restrictive trade and investment rules, controls on the transfer of technology, government procurement policies, prejudicial tax structure, incompatible

Global Financing and Exchange Rate Mechanisms: Countertrade

600 words - 2 pages , clean up bad debt, and build customer relations. Some downfalls of countertrade may be the exchange of bad quality goods, time consuming and risky.Resources:Richardson, T.G. (2005). Countertrade. Retrieved October 23, 2008 from Website: Barter Group. (2007). Retrieved October 24, 2008, from

Similar Essays

The Exchange Rate And International Trade

3379 words - 14 pages U.S Treasury has been assigned primary resonsiblity for international financial policy by Congress, the Treasury usually works alongside the Federal Reserve System when deciding to intervene. These interventions do not occur often. Rather, they are implemented as an attempt to shift supply and demand on a long-term basis. Agencies Involved in Determining the Exchange Rate The Federal Reserve Bank and the United States Department of

The Exchange Rate Essay

1181 words - 5 pages " gesture. The seller's finance department will likely have little concern about this risk if it is short-term in nature, since short-term exchange rate risks can be addressed in three short steps.Financially-Based SolutionsStep 1: Identify the ExposureA financially sophisticated seller will likely use one of three major types of risk management products to hedge currency exposures, depending on the size and frequency of the foreign exchange

Australia And Its Exchange Rate Essay

768 words - 3 pages forces of demand and supply, buyers and sellers determine the equilibrium exchange rate price. Conversely, in the case of a fixed currency, the Government and its representatives are also able to determine the exchange rate price of one country in terms of another. Australia operates under a flexible exchange rate where acting market forces determine the exchange rate price, although the Reserve Bank can, and has so in the past 'managed' the

Determining The Foreign Exchange Rate Essay

1143 words - 5 pages the bank rate to further increase to lower domestic inflation, it would result in anticipation of future appreciation of the currency. This expectation results in appreciation of the currency. A Report of the Committee on Fuller Capital Account Convertibility accepted that volatility in exchange rate is caused due to flexible exchange rate policy, inflationary pressure and capital inflow. It recognized that interest rate management could be a