IMF Chapter 10

Question 1

What were the positive benefits of fixed exchange rates?

Answer 1

1. Promote international trade and investment
2. Provide discipline for macroeconomic policies
3. Promote international cooperation
4. Speculation under floating rates is likely to be destabilizing
5. Fear of floating
6. Fiscal policy autonomy

Question 2

What were the positive benefits of floating exchange rates?

Answer 2

1. Ensure balance of payments equilibrium
2. Ensure monetary autonomy
3. Insulate economies
4. Promote economic stability
5. Speculation is stabilizing

Question 3

How does fixed exchange rates promote international trade and investment?

Answer 3

Exchange rate fluctuations cause uncertainty and risk in international economic transactions and fixed exchange rates provide a good environment

Question 4

How does fixed exchange rates provide discipline for macro economic policies?

Answer 4

It negates the pursuit of reckless macroeconomic policies as this leads to devaluation pressures, and resisting to the undertaking of unsound expansionary macroeconomic policies prior to elections.

Question 5

How does fixed exchange rates promote international cooperation?

Answer 5

Countries that agree to a peg generally also have to agree on measures to be undertaken

Question 6

What is the Bandwagon effect?

Answer 6

Where irrational speculation feeds the speculation rather than speculation on the fundamentals

Question 7

What is the Peso problem?

Answer 7

Where rational speculators produce the wrong exchange rate due to not only determining using the underlying fundamentals but also what is to be expected to those fundamentals.

Question 8

How does floating exchange rates ensure balance of payment equilibrium?

Answer 8

The exchange rate automatically adjusts to ensure continuous equilibrium between demand and supply of the currency.

Question 9

How does floating exchange rates ensure monetary autonomy?

Answer 9

Each country is able to determine its own inflation rate

Question 10

How do floating exchange rates insulate economies?

Answer 10

Well an increase in foreign prices and if the exchange rate moves in line with the PPP, the domestic currency would merely appreciate and such preventing importing of foreign inflation

Question 11

How do floating exchange rates promote economic stability?

Answer 11

In a case of loss of international competitiveness its better to allow depreciation than maintain a fixed exchange rate and require deflationary policies to maintain international competitiveness

Question 12

How is floating exchange rate speculation stabilizing?

Answer 12

It is of the interest of speculators to move the exchange rate to its fundamental economic value

Question 13

What are the advantages of managed floating?

Answer 13

1. CN may produce a better exchange rate?
2. Interventions can dampen overshooting
3. Interventions smooth adjustment process

Question 14

What did Rogoff et al. (2003) derive?

Answer 14

They analysed correlation between exchange rate rigidity and economic performance for 3 groups of countries: lower-developed countries, emerging markets and developed countries.

Question 15

What did Rogoff et al say about the different countries?

Answer 15

1. Lower developed:
   Finding: rigid exchange rate gives lower inflations and not more frequent crises, because of policy credibility and low exposere to international markets
2. Emerging markets:
   Finding: Rigid exchange rate no gains in terms of inflation or higher growth and more frequent crisis, because policy credibility is less relevant and higher exposure with international markets
3. Developed countries:
   FInding: Floating rates faster growth withour higher inflation, because of financial maturity.