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Spectrum of Exchange Rate Arrangements … From Fixed to Flex

Spectrum of Exchange Rate Arrangements … From Fixed to Flex. Currency Union: EMU/USA/CFA Dollarization: Ecuador/Panama Currency Board: Argentina, 1990s Commodity Standard: Gold Standard Adjustable Peg: Bretton Woods Target Zone: ECU – ERM Crawling Peg: Mexico, early 1990s

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Spectrum of Exchange Rate Arrangements … From Fixed to Flex

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  1. Spectrum of Exchange Rate Arrangements… From Fixed to Flex • Currency Union: EMU/USA/CFA • Dollarization: Ecuador/Panama • Currency Board: Argentina, 1990s • Commodity Standard: Gold Standard • Adjustable Peg: Bretton Woods • Target Zone: ECU – ERM • Crawling Peg: Mexico, early 1990s • Dual Exchange Rate Systems : : • Dirty Float/Managed Float • Clean Float

  2. Review: Monetary Union Benefits and Costs Benefits • Reduced Transaction Costs • Reduced Uncertainty/Currency Risk • Long – term capital flows • Hot money … extinguished • DISCIPLINE • Monetary Policy/Fiscal Stance • Wages and Prices

  3. Review: Monetary Union Benefits and Costs Costs • DISCIPLINE • Loss of discretion • Asymmetric shocks …different strokes • Alternative Flexibility • Flexible wages • Labor mobility • Capital mobility • Division of Seignorage

  4. Fixed Exchange Rates in History: Some Terms • The Gold Standard • Par Value • Gold Points • “Bank Rate” • Bretton Woods … IMF • Key Currency • Vehicle Currency • Fundamental Disequilibrium • Standard Drawing Rights (SDR) • Exchange Stabilization Fund • Devaluation / Revaluation

  5. Recent Currency CrisesSpeculative Attacks, Contagion • European Monetary System, Sept 1992 • UK • Sweden • Italy • Mexico Tequila Crisis, Dec. 1994 – 1995 • East Asia, 1997 - 1998 • Thai bhat • Indonesian rupiah • Malaysian ringgit • Philippine peso • Korean won • Hong Kong/Singapore/Taiwan dollars • Russia, 1998 • Brazil, 1998 • Argentina, 2001 • Prescription: Tobin Tax  Repel hot money

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