Exam 9: Foreign Exchange Rate Determination and Intervention

Leading up to the Russian currency collapse of 1998, Russia followed a currency policy of managed float that allowed their currency to slide daily at a 1.5% per month rate.

In 1991, Argentina adopted a currency board (the Argentine peso had been pegged to the U.S. dollar at a one-to-one rate of exchange) to fight hyperinflation. This currency board lasted for a decade until the economic crisis of 2001. Discuss: 1) the pros and cons of a currency board policy, 2) the crisis condition of the Argentina's economy by 2001, and 3) the lessons to be drawn from the Argentina story.

Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

The ________ is the Argentine currency unit.

Indirect intervention for domestic currency valuation typically uses tools of monetary policy as opposed to using tools of fiscal policy.

A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company's expected rate for the euro per pound to be in one year?

Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

The smaller and less liquid markets and currency markets frequently demonstrate behaviors that follow the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.

If the goal were to decrease the value of a country's currency - to fight an appreciation of the domestic currency in exchange for foreign currency - the central bank would:

Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.

If a central bank wishes to "defend its currency," it might follow an expansive monetary policy, which would drive real rates of interest up.

A currency board is:

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.

Prior to July 2, 1997, the Thai government:

In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.

The fall in the value of the domestic currency will sharply reduce the purchasing power of foreign tourists in the country whose currency values are falling.

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

________, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future.

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.