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Chapter 12: Exchange Rate Policy (Causes of changes in exchange rate…
Chapter 12: Exchange Rate Policy
Causes of changes in exchange rate
Relative interest rates
Relative income changes
Relative changes in price levels
Limitations of PPP theory
Ignores effect of trade restrictions
not all goods are internationally traded
lack of homogeinity of products
BOP performance
Changes in tastes or preferences
FDI
Speculation
Devaluation
J-curve effect
Devaluation as a measure to correct BOP deficit
elasticity of demand for imports and exports
price elasticity supply of imports and exports
Devaluation should not create inflationary pressures
Other countries do not retaliate
confidence effect
Definitions:
Appreciation: Increase in the external value of a currency in terms of other currencies in FOREX market caused by market forces
Depreciation: Reduction in the external value of a currency in trms of other currencies in FOREX market caused by market forces
Exchange policy in SG
Small with limited resources
Openness to trade
Openness to trade flows
Effect of Changes in exchange rate
Internal Impact of changes in exchange rate
Income & employment
Inflation rate
External impact of changes in exchange rate
International competitiveness
Financial flows
BOP
terms of trade
External debt