Ques5: Explain various exchange rate regimes in international

market with example?

An exchange rate regime is the way an authority manage 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. the basic type are a floating exchange rate, where the
market dictates movements in the exchange rate; a pegged float, where a
central bank keeps the rate ,which ties the currency to another currency ,
mostly more widespread currencies such as the Indian rupees or euro or a
basket of currencies.
exchanged for 8.28 Yuan.
Feature
Exchange
1. itive. If it is too low, it could cause inflation.
4. Current Account Imbalances. Fixed exchange rates can lead to current
account imbalances. For example, an overvalued exchange rate could cause
a current account deficit.

1. Fixed but adjusted exchange rate:

Nominal exchange rate is fixed but central bank is not restricted by strict
rules . Sometime it may intervene to the market. This regime provide
macroeconomic discipline, because expectation of risk decreases especially
exchange rate risk in foreign trade. Devaluation chance causes elascity in
the economy. On other hand, if the devaluation rate is too high, that will
cause uncertainity. uncertainity increase the inflation expectation.
features
Requires heavy govt involvement.
BOP deficits are much more troublesome than BOP surpluses
Example: BOP surplus indian central bank simply sells rupees-which it
can print freely--and exchanges them for foreign exchange (U.S. dollars)
This alleviates the shortage of rupees in the FOREX market, causing the
rupeess value to depreciate back to the promised rate.
2 Full Dollarization:
Country uses another countrys currency. That means its monetary policy is
dependent on the other country . the credibility level is at maximum .some
of the latin American countries implemented this regime. On the contrary ,
system does not have elasticity . external shocks can only be absorbed by
unemployment and recession.
A foreign currency acts as legal tender. Monetary policy is delegated to the
anchor country.
Other currency as exchange rate:

Brunei (BND)

Benefits:
The time-inconsistency problem is reduced (subject to the perceived
probability that the regime is abandoned) and real exchange rate volatility is
diminished.
Drawback:
External shocks cannot be buffered by exchange rate movements, imposing
costs if business cycles are asynchronous. The scope for lender of last resort
activity is restricted to excess reserve holdings and fiscal mechanisms.
Requires high reserve holdings.
4 Crawling Peg:
Crawling peg means change exist with minor base. It means change in
exchange rate with minor rate like10 is rate if changes come then rate will
be 10.2. Nominal exchange rate is adjusted periodically according to some
economic indicators. The band is very narrow. Market expectation are
corrected according to this system. Credibility of policies is higher.
Example:
US dollar as exchange rate
Country name: Nicaragua (NIO)
Composite exchange rate

Country name: Botswana (BWP)

Feature:
A rule-based system for altering the par value, typically at a predetermined
rate or as a function of inflation differentials.
Benefits:
An attempt to combine flexibility and stability. Often used by (initially) high
inflation countries pegging to low inflation countries in an attempt to avoid
trend real appreciation.
5 Crawling Band:
It refers to those band which is decided by a fixed rate like 10-15 and rate is
change with this rate .it means rate fluctuate with slowly- slowly. Not change
suddenly like firstly take 10 then take 10.5.
Example: firstly Decide 10 to 15 is exchange rate then in starting take 10
then if changes come in rate then take 10.5.
Some country name where crawling band follow are:
US dollar as exchange rate
Honduras (HNL)

Jamaica (JMD)
Euro as exchange rate

Croatia (HRK)