IMF Role and its Determination in Exchange Rate Variation
It is imperative to appreciate that managers need to understand how exchange-rate changes impact on business decisions and the different operations that are carried out in an organization. Moreover, it is also important to appreciate the meaning of exchange rate as the cumulative number of units that one currency is exchanged for another. It is for this significant reason that administrators of any organization need to understand the different issues that are taken into consideration by the government in setting the exchange rate and factors behind the exchange rate variation so as to anticipate effectively for the change. The international monetary fund (IMF) was established with the principal objective being the different efforts to stabilize the exchange rate and allow for smooth flow of international currencies, an aspect that will help enhance the international trade (Neagu et al., 2012). Furthermore, IMF plays other significant roles in different economies, which include not only allowing for a multilateral system of payments but lending to various governments as their last resort. Therefore, we can classify the roles of IMF into threefold as follows;
Short-term Credit Institution
This fold can be explained by the fact that it comes in handy to different member countries once there is a need for liquidity, especially when there is an adverse balance of payments. It is a requirement for every country to have a monetary reserve with the institution so as to carry out their normal operations without any form of difficulty whatsoever. The primary purpose for the above fund is to act as a kind of source for funds in case a country finds itself amid emergency situation (Yu et al., 2014).
Mechanisms for Providing Long-term Balance of Payments Position
The institution has a harmonized adjustment of exchange rate variation and does not allow any form of manipulation by any member country to create a competitive depreciation. However, in case a country wishes its exchange rate is not in agreement with the economic growth of its country, it is possible that the rate can be adjusted but after an understanding between the countries agencies and the different personal from IMF.
International Consultation
It is worth noting that the organization harmonizes the conflicting claims of member countries by uniting them, an aspect that helps in the stabilization of the world economy. This action, therefore, results in enhancement of the international trade between countries and a balance of commerce as a consequence of the same.
Exchange Rate Determination
As mentioned earlier, the IMF has the mandate of regulating the exchange rate through consistent monitoring of the different economic policies of the member states so as to be in harmony with exchange rate policies.
Exchange Rate Regimes
Exchange rate regimes indicate the process through which a state can manage its currency about the international market and is often related to the different monetary policies in the market. The floating exchange rate is the first kind of regime that is often used by countries and in this case, currency value often fluctuates based on the international market conditions. In the case, the money using this type of regime is referred to as the floating currency such a dollar, which is frequent in the international trade. Moreover, it is the most popular system across the globe as it varies based on the different economic circumstances and avoids any chances of occurrence of the balance of payments (Van Hoorn, 2014).
Fixed exchange rate system is another option available to countries involving themselves in the international trade, and in this case, countries try to maintain their currency based on another currency or good. However, for the case of this kind of regime, a currency remains fixed concerning certain assets and the central bank of a country buys the suggested goods at a fixed price. However, to maintain the pegged value of the currency, the central bank of countries using the above system have to possess reserves of goods used such as gold or the international currency indicated (Bohl et al., 2016).
Pegged float exchange rate refers to a regime that utilizes both the band and can either be fixed or variable based on market conditions and is further classified into threefold. Bohl et al., (2016) asserts that crawling band as the first classification indicates the market value of the state currency, which is allowed to vary within a set range that is agreed on by the international group or the central bank. For the case of crawling pegs, it allows for depreciation or appreciation in the currency value although its market terms vary significantly. Pegged with the horizontal band (as a different type of regime) enables the value of a state currency to vary considerably but with a wider scope than one percent of the country's currency value.
Role of central banks
Apparently, every country has to have a central bank, which is generally given the mandate of enacting and adjusting the different policies concerning its currency. Moreover, the institution bases its competence on liquidity, an aspect that helps guarantee that the countries have cash and the necessary flexibility that is often required to help protect the country's currencies (Capie, 2015). However, it is important to appreciate that reserves in such institutions are kept in three main forms which include;
Gold standards
Foreign exchange reserves
And IMF assets
Treasury in any state has the mandate of intervening in the international market to realize the set policies of the monetary policies of the respective country. For example, when selling the US dollar to obtain a foreign currency, it is imperative appreciating the fact that its value will go down and vice versa when one is purchasing the same. Moreover, the US Fed acts as the primary banking institution that helps the IMF to keep in contact with all the other central banks around the world. Some of the significant roles played by central bank include the following;
It helps in coordinating the different activities that are performed by other central banks around the world to be in harmony with the IMF regulations
Help manage the different policies issues in the market to help build the reputation of the concerned currency in the international market
It helps bring order to the market by controlling the exchange rate that is experienced
The central banks have the mandate of intervening the market to either support, resist or reverse a market trend
Theory of Purchasing Power Parity (PPP)
PPP, as mentioned in the above study, is an exchange rate concept that holds that cost of merchandise can be compared and equated in different countries. According to the concept, it is assumed that the value of goods between two countries can be equal if only the economic conditions such as inflation rate and exchange rate cost are taken into account. Moreover, it is evident from the theory that transaction in one country has a significant impact on the foreign exchange market. Moreover, the concept further asserts that price of an identical product should be the same in two countries if only some of the costs of transportation and differential taxes are not accounted for (Salman & Shukur, 2015).
Exchange Rate Movements
It is, therefore, important to appreciate that managers need to understand or have a clue on how to time or forecast the rate exchange movements so as to make informed decisions regarding business operations. One of the approaches through which they can tell the above objective is through fundamental forecasting, and this initiative requires the use of economic variables in the market to determine the change. However, technical forecasting can also be considered for the above case but utilizes past information concerning the exchange rates so as to predict the future. Therefore, good managers should develop their exchange forecast using the two approaches so as to make informed decisions concerning the business. Some of the important aspects to consider in the above situation include the setting of the company, other issues like the PPP, balance of payments experienced in a country, reserve levels, among other important aspects (Bhattarai et al., 2015).
Potential Effects of Rate Exchange Fluctuations on Business Operations
With the current trend of globalization, it is important to appreciate that exchange rate fluctuations can vary significantly hence affecting various operations of a company.
Marketing decisions
The change can influence the demand level for products to a business in the market, for example, when a state currency improves, it would reduce the exports realized due to the high prices incurred by the foreign market while advantaging the importers.
Production decisions
It is imperative to note that multinational organizations may decide to operate in countries with weak currency as the initial capital for starting the business is relatively small and has a huge potential to attract exportation of the products.
References
Bhattarai, S., Lee, J. W., & Park, W. Y. (2015). Optimal monetary policy in a currency union with interest rate spreads. Journal of International Economics, 96(2), 375–397.
Bohl, M. T., Michaelis, P., & Siklos, P. L. (2016). Austerity and recovery: Exchange rate regime choice, economic growth, and financial crises. Economic Modelling, 53, 195–207.
Capie, F. (2015). The role of central banks in financial stability: How has it changed? Edited by Douglas D. Evanoff, Cornelia Holthausen, George G. Kaufman, and Manfred Kremer. Singapore: World scientific publishing Co., 2014. Xi + 455 pp. Figures, tables. Cloth, $138.00. Business History Review, 89(01), 178–179.
Van Hoorn, A. (2014). The global financial crisis and the values of professionals in finance: An empirical analysis. Journal of Business Ethics, 130(2), 253–269.
Naudé, M., Dickie, C., & Butler, B. (2012). Global Economic Crisis: Employee Responses and Practical Implications for Organizations. Organization Development Journal, 30(4), 9-24.
Neagu, C., Luscu, S., & Neagu, L (2012). The Mechanics of Human Mind in the Economic Environment.
Salman A. & Shukur G. (2015). Purchasing Power Parity Theory Determinants –A Swedish Destination Study of International Tourists: A Count Data Approach. American International Journal of Social Science, 4(2), 294-316
Yu, T. F., Kwan, D. S., & Yuen, W. (2014). International economic development: Leading issues and challenges. London: Routledge.
