OPEN- ECONOMICY MACROECONOMICS
Fixed versus Flexible Exchange Regime, Determination of Exchange Rate in Free Markets:
Fixed currency exchange rate, or in other terms pegged exchange rate denotes the fixation of a currency value against any other currency or to a whole lot of other currencies. This is usually done for stabilization of the currency pegged to the other currencies. Floating Exchange Rate is the exchange rate of the currency value which is fixed by the free market. The exchange rate of a currency is variable depending upon the amount kept in foreign reserve and fluctuating demand and supply of the particular currency.
Another factor to ponder over when we consider the subject of macroeconomics is that the banking industry should not be left in the shadows . The question is whether bank runs over the crises in any way. The obvious answer is that many people feel that bank run would have happened in a developed economy. This is the precise reason on why the macroeconomics as well as the financial economics has developed on a large scale.
In case of managed or dirty floating, The Central Bank steps in occasionally. Foreign exchange Intervention can be two types, the one which changes the monetary base and the latter, where there is no change in financial platform. The term applied for the former one is called non sterilization while the second one is called sterilized intervention. In case if any country sells or buys foreign exchange, the monetary base of that authority increases or decreases, depending upon the volume of buying or selling. This mode of transaction influences exchange rates similarly as in buying and selling of securities in domestic market. In certain instances, the Central Bank sterilizes the foreign exchange transactions by reversing the impact on the operation of foreign exchange on domestic financial base by selling and buying domestic bonds. (As per jEdison 1993)
The Asian countries are facing a lot of challenges in the global world of today. The evolution of rapid growth as well as the influx of western ideas in their domain is presenting a unique challenge of sorts. The old investment as well as the export policies is more a thing of the past. In this regard the countries in Asia must recognize the fact that the only way to move forward is economic freedom. An ideal example in this regard would be China were the prosperity has come when the country instituted rural property rights which opened up domestic trade as well as exposed the country to international competition.
Official Intervention in Changes of Foreign Exchange Reserve:
Currency fluctuations may happen when an unexpected volatility in exchange rates creeps in because of the floating exchange rates, which complicates the achievement of price stability and have an adverse effect on employment and output especially in open economics. Central Banks often intervene to counteract currency fluctuations which may be detrimental to the country’s economy. Here the Central Banks buy and sell their own currency in order to stabilize the volatile situation, but the question remains as to how many times do Central Banks intervene and what are the conditions that prompt them to take such a step. Whether Central Banks have profited from such interventions or whether the exchange rates have been influenced through intervention remains a question because Central Banks have been reluctant on releasing the data of intervention. Certain strategies have been followed by researchers in deciphering the
Intervention data, some keeping important transaction data confidential while some others have relied on news reports and have substituted them for actual intervention data. A popular strategy has been to use the data relating to reserves in the foreign currency trading market, released publicly as proxy of the real time data. Using data from changes in reserves instead of intervention, researchers have been able to study intervention in a broader spectrum with a number of countries and over a long period of time. This would not have been possible in case of actual intervention data. The drawback of these studies is that reserves always change due to certain other factors than intervention, which makes the data an incorrect proxy for official intervention. Changes in reserve may happen when a Government pays off debts in the foreign currency denomination, where the reserves fall.
In the Indian scheme of things it is suggested that India does not need to push to aggregate demand through monetary as well as fiscal policies. If these measures are not taken then the aggregate demand might have taken an downswing on all counts and pushed India into a corner. It must be also mentioned that the steps taken by the Central government was pretty active in nature. It is also suggested that weak demand in the developed markets, the Asian companies need to tackle the situation with more and more reforms. Moderate recovery is also predicated also.
The above table depicts the Gross domestic product forecast in the United States
.S. GDP Gross Domestic Product Forecast
Billion US Dollars. Seasonally Adjusted Annual Rate.
“The Fed: A Central Bank with a Regional Structure,” by James Bullard, Regional Economist, Federal Reserve Bank ofSt. Louis, April 2010, p. 3.
Historical BeginningsThe Federal Reserve, by Roger T. Johnson, Federal Reserve Bank of Boston, December 1999. 7
Links to articles used to write this paper:
- Journal of Political Economy vol.33 no.1 Spring 2003 pg. 61-82 Thomas I Palley
- 2. The Practice of Central Bank Intervention: Looking under the Hood byChristopher J Neeley.
- Blejer and Schumacher (2000) discuss the implications of the use ofderivatives for central banks’ balance sheets.
- Christopher J. Neeley: “To counteract troublesome currency fluctuations, central banks often intervene in foreign exchange markets—buying and selling their own currency to influence its value.”
- Are Exchanges in Foreign Reserves Well Correlated With Official Intervention? By Christopher J. Neeley
Works Cited:
- Thomas P. (2003) “This pattern of boom–bust associated with initial implementation of
a fixed exchange rate and subsequent abandonment, has generated extensive
debate.” Journal of Political Economy vol.33 no.1 Spring 2003 pg. 61-82 by Thomas Palley
- Christopher J. Neeley (2007) “The crucial distinction between sterilized and unsterilized intervention is that the former constitutes a potentially useful independent policy tool while the latter is simply another way of conducting monetary policy.” The Practice of Central Bank Intervention: Looking under the Hood by Christopher J Neeley.
