fixed exchange rate system (1 Viewer)

[jeniii]

in a fixed exchange rate system RBA sets the rate right ...but is it possible for other any other forces other than gov/RBA to cause value to dep/appreciate?

brazil had a fixed exchange rate but "in 1982 .... debt reached XXX and unable to service its foreign debt, Brazil's currency depreciated sharply"

doesnt that suggest market forces caused this? or is it just the gov running out of currency to influence/control this fixed rate ... or the debt being so high, nothing could stop the value from depreciating

 

[davidw89]

My 2c

in a fixed exchange rate system RBA sets the rate right ...but is it possible for other any other forces other than gov/RBA to cause value to dep/appreciate?

Basically with a fixed exchange rate there will be greater volatitlity.

A fixed rate system is where the RBA sets the Exchange Rate either above or below the equilibrium. Now this can still fluctuate e.g. say if theres excessive supply or demand due to speculators. As a result the RBA would need vast reserve of Foreign Exchange to either buy Australian dollar if the dollar depreciates too much or sell Australian dollar if the dollar appreciates excessively.

Also external shock (e.g. decrease in global demand for commodity or decrease in global growth) will also cause fluctuation...

brazil had a fixed exchange rate but "in 1982 .... debt reached XXX and unable to service its foreign debt, Brazil's currency depreciated sharply"

That makes sense..basically Brazil was running a Currect Account Deficit (a huge one) and this caused uncertainity in the business sector (e.g. sustainability issues). As a result, foreigners withdraw (capital outflow) their investment etc which lead to a situation where S>D and hence a Depreciation in their currency.

 

[sk8ie_boi]

Let's first talk about how does the exchange stay in equilibrium. Let's just say, your country's rate of return (domestic real interest rate) should equal foreign rate of return (foreign real interest rate X exchange rate). When this occurs, then exchange rate will be in equilibrium.

Because if the foreign rate of return is higher than domestic. Wouldn't everyone invest into the foreign market? Then eventually leading to the leveling of the exchange rate.

Fixed Exchange Rate: To control exchange rate, RBA must adjust interest to foreign interest rate.

What factors would influence the exchange rate? Simply think about what would increase the demand for domestic currency? Maybe, lower interest rate? Increased domestic competitiveness? At the same time, higher foreign interest rate. Higher foreign growth ==> increase export from domestic production.

 

[kokodamonkey]

Q. Is A Managed Exchange Rate System The Same As A Dirty Float?

no. a managed exchange rate system is the flexible peg. which is like a fixed one except they set the rate on each day.


a "dirty float" is when you have a market/free system like we do but the rba buys n sells in the forex in order to smooth things over.