Managed floating

1
Managed floating

• the present system is a hybrid of the pure
  fixed and floating rate systems
• understanding of fixed exchange rates give us
  insight into the effects of foreign exchange
  intervention when it occurs under floating rates.

2
Regional currency arrangement

• exchange rate unions
• member fix their mutual exchange rates
• non-member fluctuate

3
Developing transitional countries

• Nearly half of the worlds countries engage in
  some sort of currency peg.

4
Lessons of the past for the future

• Fixed exchange rates were the norm in many
  period.
• Decades before World War I
• Between the mid-1920s and 1931
• Between 1945 and 1973

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foreign assets

• foreign assets foreign currency bonds own by the
  central bank.These foreign assets make up the
  central bankss official international reserves,
  and there level changes when the central bank
  intervenes in the foreign exchange market by
  buying or selling foreign exchange.

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Domestic assets

• central bank holdings of claims to future
  payments by its own citizens and domestic
  institutions.
• form domestic government bonds and loans to
  domestic private banks

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Private bank deposits

• liabilities of the central bank
• because the money may be withdrawn whenever
  private banks need it.

8
Currency in circulation

• central bank liability mainly for historical
  reasons At one time, central banks were obliged
  to give a certain amount of gold or silver to
  anyone wishing to exchange domestic currency for
  one of those precious metals.

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When central bank purchases an asset, it can pay
for it in one of two ways

• A cash payment raises the supply of currency in
  circulation by the amount of the banks asset
  purchase.
• A payment by check promises the checks owner a
  central bank deposit equal in value to the
  assets price.

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When the recipient of the check deposits in her
account in a private bank

• the private banks claims on the central bank
  (and thus the central banks liabilities to
  private banks) rise by the same amount.

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Asset sales by the central bank

• withdrawal of currency from circulation
• reduction of private claims on the central bank,
  and thus a fall in central bank liabilities to
  the private sector.

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Sterilization

• The act or procedure of The condition of being
  sterile.??, ??/(?)??, ???/??
• To make incapable of bearing fruit or
  germinating.//To render (land) unfruitful.
• To place (gold) in safekeeping so as not to
  affect the supply of money or credit.
• To make inoffensive or innocuous

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private capital outflow

• Residents flee the domestic currency by selling
  it to the central bank for foreign exchange they
  then invest the proceeds abroad.

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