Glamor Economics

Chapter 123

Chapter 16 Section 3 "Traffic Light" in International Trade Exchange——Exchange Rate System

After World War II, the Argentine economy developed rapidly.However, due to long-term domestic political turmoil, frequent government changes, and lack of continuity in economic policies, Argentina's economy has experienced a major recession. From the 20s to 70, there were seven currency crises in Argentina, and each currency crisis was accompanied by severe inflation.In the 1990 years from 7 to 1975, except for 1990 when the inflation rate was 16%, the inflation rate in other years was above 1986%.Under the blow of chronic hyperinflation, investors lost confidence in the Argentine currency, which led to the complete dollarization of the Argentine economy.In order to reverse the economic recession, in 90.1 neoliberal economist Carvalho took office as Minister of Economy of Argentina. In March, the government introduced the "Free Exchange Law", which fixed the exchange rate at 100 peso to 1991 dollar. The central bank used foreign exchange, gold and Other foreign security guarantees guaranteeing the free convertibility of the two currencies. The "Convertibility Act" brought hyperinflation under control, and by 3 the inflation rate fell to 1%. From 1 to 1994, Argentina's economy achieved continuous growth.It can be said that the currency board system became an important measure for the Argentine government to save the economy at that time, and it also achieved encouraging results.

Soon, however, this strict currency board system was challenged from both inside and outside, and the Argentine economy fell into trouble again.

In 1995, due to the impact of the Mexican financial crisis, the Argentine economy experienced negative growth.Since the currency board system deprived the central bank of monetary policy tools, fiscal policy became the only option for the Argentine government when the economy was in recession and unemployment was rising.The Argentine government chose an expansionary fiscal policy, that is, by issuing bonds to stimulate investment projects and achieve economic growth.But this approach created a situation that got out of hand. From 1995 to 1996, the government's fiscal deficit rose from $24 billion to $40 billion.What's more, the accumulation of debt also drives up domestic interest rates. In 1997, under the influence of the Asian financial turmoil, the Argentine economy entered recession again.By 2001, Argentina's external debt had reached $1400 billion.

The collapse of the Argentine currency board system has brought profound enlightenment to people.The currency board system is an extremely strict currency issuance system, which has freed Argentina from years of hyperinflation; at the same time, it is an extreme fixed exchange rate system. When the impact of internal and external imbalances occurs simultaneously, the currency board system will There is a lack of flexible monetary policy and exchange rate policy to deal with shocks.

The international exchange rate system is like a traffic light in traffic, which plays a vital role in international trade.There are two main types of exchange rate systems in the world: fixed exchange rate system and floating exchange rate system.

1. Fixed exchange rate.A fixed ratio is maintained between the domestic currency and the currencies of other countries, exchange rate fluctuations can only be limited within a certain range, and official intervention is used to ensure the stability of the exchange rate.

The exchange rate under this system is either regulated by the input and output of gold, or fluctuates within the statutory range under the control of the monetary authority, so it is relatively stable.It is conducive to the stable development of the economy, and is conducive to the calculation of cost and profit of economic entities in international trade, international credit and international investment, and avoids the risk of exchange rate fluctuations.

Before the exchange rate reform in 2005, the RMB's fixed exchange rate system was pegged to the US dollar, which weakened the RMB's ability to regulate the exchange rate.

2. Floating exchange rate.The symmetry of a fixed exchange rate means that the national currency authority does not stipulate the official exchange rate between the national currency and another country's currency, but only determines the exchange rate according to the relationship between market supply and demand.Officials only intervene in the market when the exchange rate fluctuates excessively. This is the exchange rate system generally implemented in Western countries after the disintegration of the Bretton Woods system.

There are various forms of floating exchange rates, including free floating, managed floating, pegged floating, single floating, joint floating, etc.Since changes in exchange rates are determined by market supply and demand, floating exchange rates fluctuate more frequently than fixed exchange rates, and the volatility is large.Under the floating exchange rate system, the exchange rate is not purely free floating, and the government will intervene in the exchange rate either explicitly or implicitly when necessary.

Under the current international monetary system, most countries implement a managed floating exchange rate system.Managed floating exchange rates are based on supply and demand in the foreign exchange market and are floating, not fixed.The difference between it and the free floating exchange rate is that it is managed by macro-control, that is, the monetary authority announces the exchange rate according to the price formed in the foreign exchange market, allowing it to float up and down within the specified floating range.Once the exchange rate fluctuates beyond the prescribed range, the monetary authorities will enter the market to buy and sell foreign exchange to maintain a reasonable and relatively stable exchange rate.

[links to related words]

Exchange Rate Overshooting Theory Exchange rate overshooting usually means that a variable's short-term response to a given disturbance exceeds its long-term stable equilibrium value, and thus is followed by an opposite adjustment.The prerequisite for exchange rate overshooting is that commodity prices are sticky.The so-called sticky price means that the price of a commodity stays fixed in the short term, but as time goes on, the price level will gradually change until it reaches its new long-term equilibrium value.

Equilibrium exchange rate In 1934, the British economist Gregory first proposed the concept of equilibrium exchange rate.He said that there are actually three kinds of exchange rates: first, the de facto exchange rate, that is, the prevailing exchange rate in the market; second, the real equilibrium exchange rate, which is based on purchasing power parity and then estimates various factors in the balance of payments And the exchange rate derived from various other factors that have nothing to do with inflation; third, the purchasing power parity is the exchange rate calculated based on the comparison of the general price levels of various countries.Gregory believes that the real equilibrium exchange rate is only very close to purchasing power parity, not equal to purchasing power parity.As for the de facto exchange rate, it is different from both the real equilibrium exchange rate and the purchasing power parity.

(End of this chapter)