GOVT INFLUENCE ON EXCHANGE RATE

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Presentation transcript:

GOVT INFLUENCE ON EXCHANGE RATE

EXCHANGE RATE SYSTEMS 1.FIXED 2.FREELY FLOATING 3.DIRTY FLOAT

FIXED Def: Bretton woods Agreement 1944-1971 Currencies were valued in terms of Gold Value of US $ was set as 1/35 Ounce of Gold Allowed Fluctuation was 1% (+) or (-) During this period US faced a Trade Deficit Smithsonian Agreement 1971-1973 Devaluation of US $ = 8% Against other currencies Fluctuation allowed was 2.25% (+) or (-) March 1973 Countries quit from agreements MNC s duties are less difficult Govt. can devalue or revalue any time

Freely floating or Clean Float Def: MNC s should devote more : Time Substantial resources To : 1.forecasting 2.measuring 3. managing exposures to exchange rate fluctuating exchange rates.

Dirty Float or Managed Float Def : B/w Fixed & Freely Floating

Advantages & Disadvantages of Fixed & Freely Floating Disadvantage of fixed 1.Inflation 2.Unemployment Advantages of Freely floating

The European Monetary System (A limited Float) The Snake Arrangement (April 1972) The European Monetary System (EMS) 1979 Exchange rates were tied up with ECU Fluctuation Allowed was 2.25% Member Countries Were : Belgium ,Denmark, France , Germany, Ireland , Luxemburg ,Netherlands

Government Interventions Direct Intervention : Huge Supply (to Decrease value) Create Shortage (to Increase demand) Indirect Intervention : Through Govt Policy Through Govt Barriers: Taxes Quotas Retaliation Against Govt Restrictions

Linkage b/w the Pak deficit ,Pak R s & the Pak Unemployment Huge Pak Deficit Excess Govt. Borrowings High Interest rate Increased Foreign investment R s value Strengthen Pak exports decrease High unemployment In Pak Pak imports increase

Impact of Govt. Actions on Exchange Rates Govt. Monetary & Fiscal Policy Relative national income level Relative interest rate Relative inflation rate International Capital flows International trade Exchange rates Attractiveness of internationally traded securities Government Interventions Attractiveness of International Traded goods