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Exchange rate regime
By Lev Herasymenko
Content
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Definition
Floating and fixed exchange rate systems
Common opinion
Ukrainian exchange rate
Conclusion and recommendations
Definition
An
exchange-rate
regime is the way an
authority
manages
its
currency in relation to other
currencies and the foreign
exchange market. It is
closely related to monetary
policy and the two are
generally dependent on
many of the same factors.
The basic types:
• A floating exchange rate;
• A pegged float;
• A fixed exchange rate.
Floating and fixed exchange rate systems
A floating exchange rate
or fluctuating exchange rate is a
type of exchange-rate regime in
which a currency's value is
allowed to fluctuate in response
to market mechanisms of the
foreign-exchange market.
Pegged floats are:
•Crawling bands – when the rate is allowed to
fluctuate in a band around a central value, which is
adjusted periodically.
•Pegged with horizontal bands – when the rate is
allowed to fluctuate in a fixed band (bigger than
1%) around a central rate.
A fixed exchange rate (pegged exchange rate), is
a type of exchange rate regime where a currency's
value is fixed against the value of another single
currency, to a basket of other currencies, or to another
measure of value, such as gold.
This belief that fixed
rates lead to stability is only
partly true, since speculative
attacks tend to target
currencies
with
fixed
exchange rate regimes, and
in fact, the stability of the
economic
system
is
maintained mainly through
capital control.
Capital controls are residency-based measures such
as transaction taxes, other limits, or outright prohibitions
that a nation's government can use to regulate flows from
capital markets into and out of the country's capital
account.
A fixed exchange
rate regime should be
viewed as a tool in capital
control.
Common opinion
• Floating exchange rates are preferable to fixed
exchange rates.
• As floating exchange rates automatically adjust, they
enable a country to dampen the impact of shocks
and foreign business cycles, and to preempt the
possibility of having a balance of payments crisis.
Hybrid exchange rate
systems have evolved in
order to combine the
characteristics features of
fixed and flexible exchange
rate systems. They allow
fluctuation of the exchange
rates without completely
exposing the currency to the
flexibility of a free float.
Ukrainian exchange rate
If we look through Ukrainian economical history,
we can mark two methods of exchange rate control:
fixed exchange rate and pegged exchange rate.
The last periods when National Bank of
Ukraine used fixed exchange rate was SeptemberOctober 2014. Previous time was during 2010-2013
years.
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NBU started to use pegged
exchange rate after
Euromaidan.
After that, they came back
to fixed exchange rate for
stop fall of hryvnia in
September 2014.
And what we can see? When NBU use fixed
exchange rate we can’t buy dollars or euros in
commercial banks. Prices continue to rise.
And
foreign
exchange reserves of
NBU decrease. When
NBU lets exchange
rate flows it jump
extremely high.
Conclusion and recommendations
So, what is the cure for Ukrainian monetary
system? There are some obvious steps.
Some of them are easy
to do, some are more
complicated.
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Stop panic. Ordinary people should understand that
floating exchange rate is normal situation.
Eliminate the dollar from the standpoint of business
exchange.
NBU should use only pegged floating exchange rate.
It is necessary to abolish the illegal exchange offices.
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