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Introduces the main exchange rate systems countries can choose and explains why they matter in macroeconomics. Begins with free floating exchange rates and how market forces determine currency value.
okay hi there uh in this session in our time together we're going to walk through some of the key exchange rate or currency systems that countries can choose this is a really important macro topic if you've looked atthe economics of exchange rates one of the decisions that a country needs to make is what kind of exchange rate system to operate with so we'll look at free floating managed floating a semi- fix system fully fixed exchangerate and we just touch on currency board systems which is essentially a different type of fixed exchange rate system so these are the main currency systems when we think about a free floating exchange rate the currency value isset purely by the market by the foreign exchange or currency markets the Forex Traders so it's the strength of currency Supply matched against currency demand that really drives both the level of and changes in the external value of
the currency and in a floating system the currency can either appreciate go up or depreciate go down so you need to use those terms appreciation and depreciation with a floating exchange rate system in a free floating system there'sno intervention by the central bank bank of England for example allows the pound to find its own level its own market equilibrium it doesn't intervene directly to try to manipulate or influence the exchange rate and hence there's notarget for the exchange rate yeah the exchange rate is important as part of Economic Policy but there's no target for it and that means that interest rates the base rate for example in the UK well that can beset to achieve other objectives controlling inflation for example um now clearly some students say to me well if the if if the interest rate goes up or down that's going to affect the exchange rate which is true but
the bank of England doesn't set interest rates with regard to The Exchange red it therefore gives them more autonomy more freedom to set interest rates with regard to growth inflation domestic economic conditions a managed floating system is basically
Explains managed floating exchange rates, where central banks intervene occasionally to influence currency value. Also covers semi-fixed arrangements, using China and Singapore as examples.
uh where dayto day the currency floats Finds Its Own Market level but occasionally the central bank will intervene so the Brazilian roale and the Indian rup are two good examples of managed floating exchange rates so day today themarket sets the exchange rate but a central bank may choose to intervene occasionally uh they may want the currency to go up in which case they go into the market to buy buy to support a currency selling foreignexchange reserves or they might sell to weaken a currency adding to the foreign exchange reserves they can also use course interest rates to move the exchange rate up and down to achieve hot money flows and things now onceyou have a managed floating exchange rate the the value of the exchange rate the value of the currency does become important as part of macroeconomic policy so you might want a higher exchange rate for example to bring down
inflationary pressure uh but you might want to manage depreciation to improve your export sector competitiveness maybe to improve your trade balance or to Kickstart growth or to get an economy out of deflation so manage floating increasingly popular aswe'll see the Singapore dollar is a managed floating um currency it's managed against a basket of currencies not just one currency um uh this is the uh exchange rate from the Singapore dollar to the US dollar and they'retrying to keep it within a fairly narrow range there a managed float China has moved to manage floating away from some like 20 years ago July 2005 I think they ended the fixed exchange rate and then they movedto kind of semi fix system essentially now into a kind of stringent managed float here's our chart showing the uan to the US dollar and the People's Bank of China is the central bank they allow the Chinese Yuan
or renim to trade in a 2% range around the midpoint so basically they don't allow the currency to move too much on a day-to-day basis now how does China manage the exchange rate well first of all they haveCapital controls so that limits hot money inflows and outflows across across the border there are also strict foreign investment quotas FDI quotas and People's Bank of China has enormous reserves or foreign currency if it wants to intervene in
Describes fixed exchange rate systems, including pegs, reserve requirements, and possible realignments such as devaluation or revaluation. Then introduces currency board systems as a stricter form of fixed exchange rate.
the currency markets a fixed exchange rate of course we're now moving away from free floating to managed floating and now to fixed so with a fixed exchange rate the Central Bank wow fixes the currency value the currency becomespegged or anchored to one currency or maybe a range of currencies now crucially if you have a fixing exchange rate the Central Bank must hold enough foreign exchange reserves to intervene if and when it's needed in the currencymarkets to maintain the official currency Peg the pegged rate becomes the official exchange rate so when you're buying and selling imports and exports trading currencies takes place officially at the day-to-day official rate but of course there's often someunofficial trading particularly if the official exchange rate is out of line out of cter with what with economic fundamentals uh when you have a fix exchange rate there can be realignment so adjustable Peg uh so for example the
government might decide to devalue the exchange rate reduce the exchange rate or revalue increase the exchange rate with the agreement of the IMF quick exam Point here floating exchange rates you talk about depreciation appreciation with a fixed exchangerate you talk about devaluation and reevaluation use those words carefully the Hong Kong dollar is pegged to the US dollar the Bulgarian Lev is pegged to the euro although of course Bulgaria is hoping and planning to join Thesingle currency of the euro in 2025 or 2026 I believe now currency board system is is similar to a fixed exchange rate it's basically where a domestic currency is fully backed by a foreign Reserve currency um or oror foreign asset could be gold typically held in a fixed exchange relationship now don't worry too much about uh currency mod basically it means that if push came to shove you could fully convert one country's currency to another
currency at a fixed exchange rate so the Central Bank needs to hold enough foreign currency in reserve uh equal to the total amount of domestic currency in circulation don't worry too much about it it's a it's a slight
Reviews the key differences between floating, managed, semi-fixed, and fixed systems in a concise revision summary. Ends with examples of countries in each category and a brief closing.
it's a slight geeky point so just here's a quick summary if you're looking to revise this topic with me so free floating no currency Target no Central Bank intervention and you don't necessarily need big currency reserves because you'renot using those reserves to to manipulate the exchange rate man manage floating possible Target occasional intervention foreign exchange reserves can need need to be used for intervention although of course Central Bank can also use interest rate changes totry and move the exchange rate up or down with a semi fix system we're getting harder as we go through here yes the currency can move dayto day but the parameters or the bands within which it can moveare fixed intervention is needed if the currency moves outside the prescribed limits and of course you've got our foreign exchange reserves and with a fully fixed system yes the currency is fixed it's an explicit Target of policy uh
you need to you need intervention to maintain it at that Peg so the central bank's job is to maintain the fixed exchange rate Denmark has a fixed exchange rate against the Euro the Central Bank governor of Denmark hasone job when he or she gets get up in the morning to maintain the Danish croner exchange rate against the Euro must be an exciting job to do that uh just recently the IMF every year published kind ofa kind of overview of which currencies fit into which systems I think this is from the spring of 20203 so it's not bang up today but nothing fundamental has changed so Ecuador Zimbabwe have a fixed exchange rate withthe US dollar uh Hong Kong and Bulgaria have currency board systems Saudi and Qatar have a fixed exchange rate against the dollar Denmark and Sagal have a fixed exchange rate against the um Euro China Jamaica Croatia and Ethiopia
have kind of semif fixed exchange rates moving towards managed but essentially semi- fixed wow Jamaica Croatia China e that would be a cracking World Cup group a lot of countries a lot have a managed floating exchange rate seemsto be the most modal terms the most popular exchange R system and I think you can probably guess why because you want the advantages of some degree of stability but maybe the ability to move the exchange rate alittle bit either way so the likes of South Korea Brazil India South Africa Japan and Chile and Australia Canada Norway uh UK USA and Euro Zone they have in theory and largely in practice a free floating exchange ratesystem now if you want to add that to you know to take a screenshot and add it to your digital notes there we go well thanks for joining in this video looking at exchang R systems hope you found
it useful if you did if you could press the like button that would be hugely appreciated stay curious stay positive and uh see you sometimesoon