1. International Economics
国际经济学
Lectured by Yuanfen Tu
School of International Trade and Economics

2. International Economics By Robert J. Carbaugh 9th Edition
Chapter 16:
Exchange-Rate Systems

3. Introduction Exchange-rate practices after world war II
Nature and operation of actual exchange-rate systems
Economic factors that influence the choice of alternative exchange-rate systems

4. Exchange-Rate Practices
Exchange rate systems
Floating or Fixed?
IMF principles for member nations:
Exchange rate should not be manipulated to prevent effective balance-of-payments adjustments or to gain unfair competitive gains
Members should act to counter short-term exchange market disorders
When members intervene in markets, they should take into account the interests of other members.
Exchange-rate practices of IMF members (Table 15.1)
Choosing an exchange-rate system (Table 15.2)

5. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
General practice until the 1970s ( )
Primarily used by small, developing nations
Currencies are anchored (pegged) to a key currency
Key currency is used to as a means of international settlement
Developing nations can stabilize the domestic-currency prices of their imports and exports
To Exert restraint on domestic policies and reduce inflation
Major key currencies of the world (Table 15.3)

6. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
Continued
Anchoring (Pegging) to a single currency
Developing nations with a single industrial-country partner
Anchoring to a group or basket of currencies
Developing nations with more than one major trading partner
Helps to average out fluctuations
Anchoring to the special drawing right (SDR)
Basket of four currencies (Table 15.4)
Increased stability

7. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
Continued
Par value（平价） and official exchange rate（官方汇率）
Governments assign their currencies a par value in terms of gold or other key currencies
Determining official exchange rate by comparing the par values of two currencies

8. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
Continued
Example 1:
1ounce gold=$35 1ounce gold= £12.50
The official exchange rate between dollar and pound is $2.80= £1
Example 2:
Bolivian central bank fix their peso at 20peso=US $1
Ecuador’s sucre is set at 10 sucres (苏克雷）=US $1
The official exchange rate between the peso and sucre is 1peso=0.5 sucre

9. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
Continued
Exchange-rate stabilization
Set up an exchange-stabilization fund （外汇稳定基金）to defend the official rate
Purchases and sales of foreign currencies to iron out short-term fluctuations (Figure 15.2)
Fundamental disequilibrium
Over the long run, the official exchange rate and the market exchange rate move apart

10. Fixed Exchange-Rate System
Exchange rate systems
Fixed Exchange-Rate System
Continued
Devaluation（法定贬值）
Home currency’s exchange value depreciates, counteracting a payments deficit
Revaluation（法定升值）
Home currency’s exchange value appreciates, counteracting a payments surplus
Expenditure-switching instruments
Work on relative prices to divert domestic and foreign expenditures between domestic and foreign goods

11. Fixed Exchange-Rate System
Continued
Decisions to be made before implementation
If an adjustment in the official exchange rate is necessary to correct a payments disequilibrium
When the adjustment will occur
How large the adjustment should be

12. Devaluation and Revaluation
Exchange rate system alternatives
The terms devaluation and revaluation refer to a legal redefinition of a currency’s par value under a system of fixed exchange rate.
The terms depreciation and appreciation refer to the actual impact on the market exchange rate caused devaluation and revaluation or to changes in an exchange rate stemming from changes in the supply of or demand for foreign exchanges.

13. Devaluation/revaluation: legal and economic impact
Devaluation and revaluation
Devaluation/revaluation: legal and economic impact
In the legal sense, a devaluation or revaluation occurs when the home country redefines its currency price of the official numeraire
The economic effect of the par value’s redefinition is the impact on the market rate of exchange.

14. Devaluation/revaluation: legal and economic impact
Devaluation and revaluation
Devaluation/revaluation: legal and economic impact

15. Devaluation/revaluation: legal and economic impact
Devaluation and revaluation
Devaluation/revaluation: legal and economic impact

16. Devaluation/revaluation: legal and economic impact
Devaluation and revaluation
A devaluation in the legal sense does not necessarily ensure a devaluation in the economic sense.
It occurs only if other nations do not retaliate by initiating offsetting devaluations of their own.
Currency devaluations do have foreign repercussions similar to those of domestic policies.

17. Bretton Woods System of Fixed Exchange Rates
Adjustable pegged rates ( )
The value of the dollar was pegged to gold and the dollar was convertible to gold at the mint parity rate. (1ounce=35$)
Other nations peg the value of their currencies to the dollar and freely convert their currencies for the dollar at the pegged value.

18. Double Hook System

19. Bretton Woods System of Fixed Exchange Rates
Adjustable pegged rates ( )
Market exchange rates are kept within a band of 1 percent on either side of parity. In 1971, the margin were widen to 2.25.
When fundamental disequilibrium occurs, member nations can repeg its exchange rate.
up to 10 percent without permission from IMF and by greater then 10 percent with the IMF’s permission

20. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates

21. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates
Shortcomings
Adjustments in prices and incomes often conflicted with domestic-stabilization objectives.
Devaluation seemed to indicate a failure of domestic policies and a loss of international prestige.
It is difficulty to estimating the new equilibrium rate.
Once the market exchange rate reached the margin of the permissible band around parity, it in effect became a rigid rate .

22. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates
The defects in the Bretton Woods system
The Triffin dilemma / 特里芬两难
The inherent conflict of the U.S. Dollar being both a national currency and an international currency.
Dilemma of liquidity(清偿力) and confidence

23. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates
The defects in the Bretton Woods system
1960年，美国耶鲁大学教授特里芬在其著作《黄金与美元危机》中指出：布雷顿森林制度以一国货币作为主要国际储备货币，在黄金生产停滞的情况下，国际储备的供应完全取决于美国的国际收支状况：美国的国际收支保持顺差，国际储备资产不敷国际贸易发展的需要；美国的国际收支保持逆差，国际储备资产过剩，美元发生危机，危及国际货币制度。这种难以解决的内在矛盾，国际经济学界称之为“特里芬难题”，它决定了布雷顿森林体系的不稳定性。

24. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates
liquidity
U.S. run deficits
U.S. run surplus
confidence
Dollar shortage ; dollar glut

25. Adjustable pegged rates
Bretton woods system
Adjustable pegged rates
Dollar value per ounce of gold
1盎司值美元 35 38
脱钩浮动
42.22

26. Currency boards vs. dollarization
Stabilizing developing country currencies
A currency board is a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate
The rate is usually set in law, and the board must have foreign exchange reserves large enough to cover the domestic currency in circulation
Put another way, the domestic money supply is limited by the amount of foreign reserves on hand

27. Currency boards vs. dollarization
Stabilizing developing country currencies
Currency boards vs. dollarization
A currency board exists when a country’s central bank commits to back its monetary base – its money supply – entirely with foreign reserves at all times.
This means that a unit of domestic currency cannot be introduced into the economy without an additional unit of foreign exchange reserves being obtained first.
Currency boards do not make loans or finance government deficits

28. Currency boards vs. dollarization
Stabilizing developing country currencies
The major benefits of the currency-board system are:
Making a nation’s currency and exchange-rate regimes more rule-bound and predictable
Placing an upper bound on the nation’s base money supply
Arresting any tendencies in an economy toward inflation
Forcing the government to restrict its borrowing to what foreign and domestic lenders are willing to lend it at market interest rates
Engendering confidence in the soundness of the nation’s money
Creating confidence and promoting trade investment, and economic growth

29. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
Concerns about currency boards:
It prevents a country from pursuing a discretionary monetary policy and reduces its economic independence.
It lacks a lender of last resort.
It creates a colonial relationship with the anchor currency.

30. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
1983年10月15日，港英政府对港币发行和汇率制度作出的安排：要求发钞银行（汇丰银行和渣达银行，1993年中国银行香港分行也成为发钞银行）在增发港元纸币时，必须按1美元兑7.8港元的比价向外汇基金缴纳等值美元，以换取港元的负债证明书，作为发钞的法定准备金，这一安排标志着香港联系汇率制的诞生。因此，香港的联系汇率制实质上是美元汇兑本位制。

31. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
当港元现钞从流通中回笼后，发钞行可以用同样的比价向外汇基金换回美元，同时赎回负债证明书；发钞行以同样的方式为其他银行提供和收回港元现钞；1美元兑换7.8港元的固定比价只适用于发钞行和外汇基金之间，发钞行和其他银行之间以及银行同业、银行与客户之间的港元交易全部按市场汇率进行。

32. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
★ 香港的联系汇率制
以美元为锚货币；官方汇率 1美元：7.8港元
商业银行发行港元，100%美元发行准备
发行汇率与市场汇率并存 一般 银行
发行银行
（汇丰、渣打、中银）
外汇基金
管理局
负债证明书
1:7.8000上缴US$
1:7.8000
US$
HK$

33. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
香港的联系汇率制有两个内在的自我调节机制：
1）美元流动均衡机制。
当港元被抛售或资本流出导致美元减少时，由于美元减少，发钞银行不仅不能增发港币，还须向外汇基金交回负债证明书赎回美元，导致基础货币减少。由于货币的乘数效应，货币供应量将成倍数减少，而这又将导致利率上升，物价趋于下降，最终使港元趋于稳定。
2）套利机制。

34. 香港联系汇率制的两个内在的自我调节机制：
1. 国际收支的自动调节机制
2. 套利机制
国际收支
发行准备
货币供应量
物价、利率
美元升值
美元贬值
退美元买港元
退港元买美元
美元供给增加
美元供给减少
美元贬值
美元升值

35. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
2）套利机制。
金管局从体制上提供了维护联系汇率制的保障。
2、香港联系汇率制的利弊
联系汇率制的最大优点
有利于香港金融的稳定，而市场汇率围绕联系汇率窄幅波动的运行也有助于香港国际金融中心，国际贸易中心和国际航运中心地位的巩固和加强，增强市场信心。

36. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
2、香港联系汇率制的利弊
联系汇率制度的弱点
联系汇率使香港的经济行为以及利率货币供应量等指标过分依赖和受制于美国，从而严重削弱了运用利率和货币供应量杠杆调节本地区经济的能力。同时，联系汇率也使通过汇率调节国际收支的功能无从发挥。

37. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
Dollarization: residents of a country use the U.S. dollar alongside or instead of their local currency
Unofficial dollarization (partial dollarization): residents hold assets and bank accounts denominated in dollars
Official dollarization: U.S. dollar replaces local currency; occurred in U.S. Virgin Islands, the Marshall islands, Ecuador etc.

38. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
The reasons why dollarize:
Countries use dollarization to reduce risks for investors and avoid problems with domestic inflation and devaluations
Decrease in transaction costs
Greater openness results from a system where exchange controls are unnecessary and BOP crises are minimized.

39. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Effects of Dollarization – Ecuador
Accepting the monetary policy of the Federal Reserve
Risk that business cycles might not coincide
Federal Reserve is not their lender of last resort
Loss of seigniorage
Freedom to decide how to spend its tax dollars
Ecuador could establish its own tariffs, subsidies, and trade policies
Constraint: No recourse to printing local currency

40. Currency boards vs. dollarization (cont’d)
Stabilizing developing country currencies
Currency boards vs. dollarization (cont’d)
Implications of Dollarization for the U.S.
For each dollar sent abroad, Americans enjoy a one-time increase in the amount of goods and services they are able to consume
The USA gets an interest-free loan from other countries
Use of U.S. currency abroad might hinder the formulation and execution of monetary policy
More pressure on the Federal Reserve to conduct policy according to the interests of Ecuador

41. Floating Exchange Rates
Exchange rate system alternatives
Floating Exchange Rates
Currency prices established in the foreign-exchange market
Without restrictions imposed by government policies
Equilibrium exchange rate equates the demand for and supply of the home currency

42. Floating Exchange Rates
Exchange rate system alternatives
Continued
Achieving market equilibrium
Example: Foreign-exchange market in Swiss francs in the United States (Figure 15.3)
Market equilibrium will be established at a point where the quantities of foreign exchange supplied and demanded are equal

43. Floating Exchange Rates
Exchange rate system alternatives
Continued
Trade restrictions, jobs, and floating exchange rates
Import restrictions will gradually shift jobs from other industries to the protected industry
No significant impact on aggregate employment
Short-run employment gains in the protected industry will be offset by long-run employment losses in other industries

44. Arguments For and Against Floating Rates
Exchange rate system alternatives
Advantages
Simplicity
Continuous adjustment in the balance of payments
Adverse effects of prolonged disequilibriums are minimized
Partially insulates the home economy from external forces
Freedom to pursue policies that promote domestic balance
Disadvantages
Unregulated market leads to wide fluctuations in currency values
Prohibitively high cost of hedging
Flexibility to set independent policies leading to inflationary bias（通货膨胀偏差）
Summarized in Table 15.5

45. Managed Floating Rates
Exchange rate system alternatives
Informal guidelines established by IMF (1973)
Based on two concerns
Nations intervening in exchange markets
Clean float and dirty float
Disorderly markets with erratic fluctuations
Under managed floating, a nation:
Can alter the degree of intervention
Can intervene to reduce short-term fluctuations: Leaning against the wind （逆势干预）
Should not act aggressively with respect to their currency exchange rates
Can choose target rates and intervene to support them

46. Managed Floating Rates in the Short Run and Long Run
Exchange rate system alternatives
Managed Floating Rates in the Short Run and Long Run
Under a managed float
Market intervention is used to stabilize exchange rates in the short run
In the long run, a managed float allows market forces to determine exchange rates
Example: Theory of a managed float in a two-country framework (Figure 15.4)

47. Exchange-Rate Stabilization and Monetary Policy
Exchange rate system alternatives
Exchange-Rate Stabilization and Monetary Policy
Stabilization requires the central bank to adopt:
An expansionary monetary policy to offset currency appreciation
A contractionary monetary policy to offset currency depreciation
Example: Exchange-rate stabilization and monetary policy (Figure 15.5)
Long-run effectiveness of using monetary policy to stabilize the exchange value of the currency is limited

48. Bank of Japan Intervenes to slow Yen’s Rise
Exchange rate system alternatives
Bank of Japan Intervenes to slow Yen’s Rise
In June and July of 1999, the bank of Japan conducted several direct interventions in the currency markets
A strong yen would undermine Japan’s fragile economy.
the foreign exchange market is too big and deep to successfully fight it for long.

49. The Crawling Peg Small, frequent changes in the par value of currency
Exchange rate system alternatives
The Crawling Peg
Small, frequent changes in the par value of currency
Correct balance-of-payments disequilibrium
Used primarily by nations having high inflation rates
Proponents
Flexibility of floating rates with stability of fixed rates
More responsive to changing competitive conditions
Avoids changes that are frequently wide of the mark
Frustrates speculators with their irregularity
IMF view
Hard to apply this system to industrialized nations whose currencies serve as a source of international liquidity

50. The crawling peg
Exchange rate system alternatives
Differences from the system of adjustable pegged rates:
Under the adjustable peg, currencies are tied to a par value that changes infrequently (perhaps once every several years) but suddenly, usually in large jumps.
Under the crawling peg, a nation can make small frequent changes in par values, perhaps several times a year.

51. Exchange controls
Exchange rate system alternatives
Some nations (most, until the 1950s) use controls over foreign exchange to control the balance of payments
At the extreme, the government can have a monopoly over buying and selling foreign exchange, capturing export income and limiting import expenditures
Multiple exchange rates are also used, with different rates set for more or less desired transactions (discouraging imports, for example)

52. Exchange controls Advantages:
Exchange rate system alternatives
Advantages:
The government can influence its payments position by regulating the amount of foreign exchange allocated to imports or capital outflows.
Government can encourage or discourage certain transactions by offering different rates for foreign currency for different purposes.
Domestic monetary and fiscal policies have greater freedom in their stablization roles.

53. Exchange controls
Exchange rate system alternatives
Multiple exchange rates are also used, with different rates set for more or less desired transactions (discouraging imports, for example)
Dual exchange rates have separate exchange rate for commercial and capital transactions.

54. Exchange Rate Reform of RMB
Phase one( 1949—1972): officially determined exchange rate and a single peg
Between 1949—1952, the exchange rate of RMB in this period was completely established by the PBC with occasional adjustments according to the economic needs and political considerations. The exchange rate of RMB was adjusted frequently.

55. From 1953—1972, single currency peg, with the highly planned economy and the generally fixed exchange regime against major currencies, China’s exchange rate was relatively fixed.

56. Phase Two(1973—1985): a basket peg and dual exchange rate system.
External value: linked to a basket of international traded currencies
Internal value: official rate

57. Phase three( 1986—1993): managed floating and swap center官方汇率和外汇调剂市场汇率并存时期

58. Exchange Rate Reform of RMB
Phase four( ) : unitary managed floating and current account convertibility(单一的有管理浮动汇率制 )
Exchange regime is a tightly managed floating. The PBC establishes the central target or reference rate. The fluctuation of the RMB/dollar exchange rate is only permitted within a 0.3% band.
Phase five(2005-now): currency basket
2012年4月16日起，银行间即期外汇市场人民币兑美元交易价浮动幅度由千分之五扩大至百分之一。