Crawling peg

Crawling peg is an exchange rate regime that allows depreciation or appreciation to happen gradually. It is usually seen as a part of a fixed exchange rate regime.

The system is a method to fully use the key attributes of the fixed exchange regimes as well as the flexibility of the floating exchange rate regime. The system is shaped to peg at a certain value but at the same time is designed to “glide” to respond to external market uncertainties.

Changing rates

External pressure

To react to external pressure (such as interest rate differentials or changes in foreign-exchange reserves) to appreciate or depreciate the exchange rate, the system can have moderately-sized, frequent exchange rate changes to ensure that the economic dislocation is minimized.[1]

Rate formulae

Some central banks use a formula that triggers a change when certain conditions are met, while others prefer not to use a preset formula and frequently change the exchange rate to discourage speculations.

Advantages and disadvantages

The main advantages of a crawling peg are that it avoids economic instability as a result of infrequent and discrete adjustments (fixed exchange rate)[1] and it minimizes the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal (floating exchange regime)[1].

For example, Mexico used a crawling peg to address inflation in the peso crisis. It transitioned from a fixed exchange rate in the 1990s without the instability of rapid devaluation.[2]

In practice, the system may not be an "ideal system" under certain scenarios. For instance, if there are substantial currency flows that may affect the exchange rate, monetary authorities may be "forced" to accelerate currency realignment, leading to substantial unsystematic costs to market players. In practice, only a few countries have adopted crawling pegs.

Delayed peg

E. Ray Canterbery proposes an idea of a delayed peg to eliminate many disadvantages of the crawling peg model. The delayed peg uses a wide band for exchange-rate fluctuations, while the band is allowed to move when foreign exchange liabilities accumulate (at a secret but predetermined rate).[3] In China a new use of a "floating band" is essentially a delayed peg.[4]

Economies using crawling peg

According to the IMF's "Annual Report on Exchange Arrangements and Exchange Restrictions 2014",[5] only two countries—Nicaragua's córdoba and Botswana's pula—had a crawling-peg exchange rate arrangement at the time.

See also

References

  1. ^ a b c Daniel R. Kane (1988). Principles of International Finance. Croom Helm. p. 116. ISBN 9780709931348.
  2. ^ "Crawling Peg". Investopedia. Retrieved 2016-01-13.
  3. ^ E. Ray Canterbery (2011). The Global Great Recession. World Scientific. ISBN 978-981-4322-77-5.
  4. ^ a b Gang Yi, The People's Bank of China, "Exchange Rate Arrangement: Flexible and Fixed Exchange Rate Debate Revisited, IMF, April 16–17, 2013, pp. 5-6.
  5. ^ Annual Report on Exchange Arrangements and Exchange Restrictions 2014 (PDF). Washington, D.C.: International Monetary Fund. October 2014. p. 6. ISBN 978-1-49830-409-2.
  6. ^ Rogers, Tim (May 13, 2014). "Nicaragua seeks to de-dollarize economy". The Nicaragua Dispatch.

External links

Adolfo Diz

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Bokros package

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Currency substitution

Currency substitution or dollarization is the use of a foreign currency in parallel to or instead of the domestic currency.Currency substitution can be full or partial. Most, if not all, full currency substitution has taken place after a major economic crisis, for example, Ecuador and El Salvador in Latin America and Zimbabwe in Africa. Some small economies, for whom it is impractical to maintain an independent currency, use those of their larger neighbours; for example Liechtenstein uses the Swiss Franc.

Partial currency substitution occurs when residents of a country choose to hold a significant share of their financial assets denominated in a foreign currency. It can also occur as a gradual conversion to full currency substitution, for example, Argentina and Peru were both in the process of converting to the U.S. dollar during the 1990s.

Currency transaction tax

A currency transaction tax is a tax placed on the use of currency for various types of transactions. The tax is associated with the financial sector and is a type of financial transaction tax, as opposed to a consumption tax paid by consumers, though the tax may be passed on by the financial institution to the customer.

Economy of Botswana

Since gaining independence, Botswana has been one of the world's fastest growing economies, averaging about 5% per annum over the past decade. Growth in private sector employment averaged about 10% per annum during the first 30 years of the country's independence. After a period of stagnation at the turn of the 21st century, the economy of Botswana resumed registering strong levels of growth, with GDP growth exceeding 6-7% targets. Botswana has been praised by the African Development Bank for sustaining one of the world's longest economic booms. Economic growth since the late 1960s has been on par with some of Asia's largest economies. The government has consistently maintained budget surpluses and has extensive foreign-exchange reserves.Botswana's impressive economic record has been built on a foundation of diamond mining, prudent fiscal policies, international financial and technical assistance, and a cautious foreign policy. It is rated as the least corrupt country in Africa by international corruption watchdog Transparency International. By one estimate, it has the fourth highest gross national income at purchasing power parity in Africa, giving it a standard of living around that of Mexico and Turkey.Although Botswana's economy is considered a model for countries in the region, its heavy dependence on mining and its high rate of HIV/AIDS infection (one in every three adults is seropositive) and unemployment could threaten its success in the future.

Trade unions represent a minority of workers in the Botswana economy. In general they are loosely organised "in-house" unions, although the Botswana Federation of Trade Unions (BFTU) is consolidating its role as the sole national trade union centre in the country.

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Exchange-rate flexibility

A flexible exchange-rate system is a monetary system that allows the exchange rate to be determined by supply and demand.Every currency area must decide what type of exchange rate arrangement to maintain. Between permanently fixed and completely flexible however, are heterogeneous approaches. They have different implications for the extent to which national authorities participate in foreign exchange markets. According to their degree of flexibility, post-Bretton Woods-exchange rate regimes are arranged into three categories: currency unions, dollarized regimes, currency boards and conventional currency pegs are described as “fixed-rate regimes”; horizontal bands, crawling pegs and crawling bands are grouped into “intermediate regimes”; and managed and independent floats are described as flexible regimes.

All monetary regimes except for the permanently fixed regime experience the time inconsistency problem and exchange rate volatility, albeit to different degrees.

Exchange-rate regime

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, such as economic scale and openness, inflation rate, elasticity of labor market, financial market development, capital mobility and etc.

There are two major regime types: fixed (or pegged) exchange rate regimes, where the currency is tied to another currency, mostly reserve currencies such as the U.S. dollar or the euro or a basket of currencies; floating (or flexible) exchange rate regimes, where the economy dictates movements in the exchange rate. However, the distinctions between fixed and floating exchange rate regimes are not so cut and dried in reality. Thus, there are also the intermediate exchange rate regimes in between.

This classification of exchange rate regime is based on the classification method carried out by GGOW (Ghosh、Guide、Ostry and Wolf, 1995, 1997), which combined the IMF de jure classification with the actual exchange behavior so as to differentiate between official and actual policies. The GGOW classification method is also called Trichotomy Method.

Fixed exchange-rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold.

There are benefits and risks to using a fixed exchange rate. A fixed exchange rate is typically used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency (or currencies) to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, unlike flexible exchange regime. This makes trade and investments between the two currency areas easier and more predictable and is especially useful for small economies that borrow primarily in foreign currency and in which external trade forms a large part of their GDP.

A fixed exchange-rate system can also be used to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.

In a fixed exchange-rate system, a country’s central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. To maintain a desired exchange rate, the central bank during the devaluation of the domestic money, sells its foreign money in the reserves and buys back the domestic money. This creates an artificial demand for the domestic money, which increases its exchange rate. In case of an undesired appreciation of the domestic money, the central bank buys back the foreign money and thus flushes the domestic money into the market for decreasing the demand and exchange rate. The central bank from its reserves also provides the assets and/or the foreign currency or currencies which are needed in order to finance any imbalance of payments.In the 21st century, the currencies associated with large economies typically do not fix or peg exchange rates to other currencies. The last large economy to use a fixed exchange rate system was the People's Republic of China, which, in July 2005, adopted a slightly more flexible exchange rate system, called a managed exchange rate. The European Exchange Rate Mechanism is also used on a temporary basis to establish a final conversion rate against the euro from the local currencies of countries joining the Eurozone.

Floating exchange rate

A floating exchange rate (also called a fluctuating or flexible exchange rate) is a type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to foreign-exchange market mechanisms. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency whose value is tied to that of another currency, material goods or to a currency basket.

In the modern world, most of the world's currencies are floating; they include the most widely-traded currencies: the United States dollar, the Swiss franc, the Indian rupee, the euro, the Japanese yen, the British pound, and the Australian dollar. However, central banks often participate in the markets to attempt to influence the value of floating exchange rates. The Canadian dollar most closely resembles a pure floating currency because the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998. The US dollar runs a close second, with very little change in its foreign reserves. In contrast, Japan and the UK intervene to a greater extent, and India has seen medium-range intervention by its central bank, the Reserve Bank of India.

From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the US decided no longer to uphold the dollar exchange at 1/35th of an ounce of gold and so its currency was no longer fixed. After the 1973 Smithsonian Agreement, most of the world's currencies followed suit. However, some countries, such as most of the Gulf States, fixed their currency to the value of another currency, which has been more recently associated with slower rates of growth. When a currency floats, targets other than the exchange rate itself are used to administer monetary policy (see open-market operations).

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José Alfredo Martínez de Hoz (13 August 1925 – 16 March 2013) was an Argentine executive and policy maker. He served as Minister of the Economy under de facto President Jorge Rafael Videla between 1976 and 1981, and shaped economic policy during the National Reorganization Process military dictatorship.

List of countries by exchange rate regime

This is a list of countries by their exchange rate regime.

Managed float regime

Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries' exchange rates by buying and selling currencies to maintain a certain range. The peg used is known as a crawling peg.

In an increasingly integrated world economy, the currency rates impact any given country's economy through the trade balance. In this aspect, almost all currencies are managed since central banks or governments intervene to influence the value of their currencies. According to the International Monetary Fund, as of 2014, 82 countries and regions used a managed float, or 43% of all countries, constituting a plurality amongst exchange rate regime types.

Monetary policy

Monetary policy is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the money supply, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.Further goals of a monetary policy are usually to contribute to the stability of gross domestic product, to achieve and maintain low unemployment, and to maintain predictable exchange rates with other currencies.

Monetary economics provides insight into how to craft an optimal monetary policy. In developed countries, monetary policy has generally been formed separately from fiscal policy, which refers to taxation, government spending, and associated borrowing.Monetary policy is referred to as being either expansionary or contractionary. Expansionary policy occurs when a monetary authority uses its tools to stimulate the economy. An expansionary policy maintains short-term interest rates at a lower than usual rate or increases the total supply of money in the economy more rapidly than usual. It is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that less expensive credit will entice businesses into expanding. This increases aggregate demand (the overall demand for all goods and services in an economy), which boosts short-term growth as measured by gross domestic product (GDP) growth. Expansionary monetary policy usually diminishes the value of the currency relative to other currencies (the exchange rate).The opposite of expansionary monetary policy is contractionary monetary policy, which maintains short-term interest rates higher than usual or which slows the rate of growth in the money supply or even shrinks it. This slows short-term economic growth and lessens inflation. Contractionary monetary policy can lead to increased unemployment and depressed borrowing and spending by consumers and businesses, which can eventually result in an economic recession if implemented too vigorously.

Nicaraguan córdoba

The córdoba (Spanish pronunciation: [ˈkoɾdoβa], sign: C$; code: NIO) is the currency of Nicaragua. It is divided into 100 centavos.

Poland and the International Monetary Fund

Poland was one of the founding members of the IMF in 1945. Under pressure from the Soviet Union, the country withdrew in 1950, reasoning that the organization had become a tool for the United States. Following the end of Poland's martial law in 1983 and the United States' lifting of a veto against Polish membership, Poland rejoined the IMF in 1986.Poland’s involvement with IMF lending facilities can be separated into two periods. Emergence from Communism and Standby Arrangements: 1990-96 followed by Flexible Credit Line Arrangements: 2009-2017. The first years mark Poland’s transition from a planned to a market economy, aided by the IMF. Current changes mark Poland’s solid growth and ability to hopefully withstand any global financial crisis or Eurozone crisis. In 2018, Poland purchased a large amount of gold reserves, their largest purchase since 1983.

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Uruguayan peso

Uruguayan peso (Spanish: peso uruguayo) has been a name of the Uruguayan currency since Uruguay's settlement by Europeans. The present currency, the peso uruguayo (ISO 4217 code: UYU) was adopted in 1993 and is subdivided into 100 centésimos. There are no centésimo coins currently in circulation.

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