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7.0. - 8.0. Capital flows and teh FX Market - Exchange rate Calculations -…

- - - - Real money accounts
      - Leveraged accounts
    - - GOV
      - Central banks
      - Sovereign wealth funds
- - - - Use the currency of another country
      - Charateristics:
        
        The country inherits that currency's credibility, but not its credit-wordthiness
        
        Interest rates on U.S. dollars in a dollarized economy are usually not the same as those on dollar deposits ini the US
      - PROS:
        
        CB can't print their way out of high national debt
        
        Facilitate growth of trade and international capital flows, as it creastes an expectation of economic stability
      - CONS:
        
        Countries lose their ability to conduct independent monetary policy
    - - Member countries share the same legal tender
      - Characteristic:
        
        Monetary policy is conducted by the ECB for the entire region
      - PRONS:
        
        Give credibility to economies that have a history of fiscal excess and monetary indiscipline
      - CONS:
        
        Members do not gain creditworthiness
        
        Members cannot conduct their own independent monetary policy
  - - - Characteristic
        
        An explicit cmmitment to exchange domestic currency for a spcified foreign currency at a fixed exchange rate
        
        Currency is only issued when fully backed by holdings of an equivalent amount of that specified foreign currency
    - - Characteristic
        
        A country pegs its currency within margins of +/- 1% versus another currency or a basket that includes the currencies of its major trading or financial partners
        
        The monetary authority stands ready to buy or sell foreign currency reserves to maitain the exchange rate within a narrow band
    - - Characteristics
        
        Similar to a fixed-rate system
        
        The only difference is that the monetary authority aims to maintain the exchange rate within a slightly broader range (+/- 2%)
    - - Characteristic
        
        Passive crawling peg: the ex rate is adjusted frequently in line with the rate of inflation
        
        Active crawling peg: the ex rate is pre-announced for the coming weeks and changes are made in small steps
    - - Characteristic
        
        The width of the bands that identify permissible ex rates is increased over time, which shows that the country is moving toward a more flexible system
    - - Characteristic
        
        The country does not explicitly state its ex rate target, but intervenes in the FX markets to meet its policy objectives
    - - Characteristic
        
        The CB rarely intervenes in the determination of its ex rate, which is left to be determined by market supply and demand factors
- - - - Special taxes on returns on international investment
      - Taxes on certain types of transactions
      - Mandatory reserve requirements
    - - Limiting the maximum of the borrowings from foreign creditors
      - Requiring special authorization for borrowings from foreign creditors
      - Requiring GOV approval for certain transations
    - - On internaitonal trade in asset
  - - - Short-run benefits:
        
        capital restrictions help developing countries avoid impact of great inflows of foreign capital (expansion) and large outflows of foreign capital (contraction).
      - Short-term benefits may not offset long-term coss capital restrictions
        => decrease economic welfare in overall
    - - Long-run cost:
        
        Administrative costs
        
        Controls may give rise to negative market perceptions and make it more costly for the country to raise foreign funds
        
        Protection of domestic financial markets may delay necessary policy adjustments or impede private-sector adaptation to changing international circumstances