Foreign exchange balance policies

Foreign exchange balance policies

1. Exchange rates

   • Fixed exchange rate
     • 2007: most normal
     • Allows countries with chronic inflation problems
     • Strength commercial links
     • Risk if cycles aren't synchronized
     • Easy to implement
     • Many countries in Middle East, Africa and Asia
     • Simple operation to adjust competitiveness
     • Need of a big reserve
     • Restricts flexibility and room for manoeuvre of monetary policy
   • Flexible exchange rate
     • Often monetary policy framework of inflation
       • No target for the level of exchange rate
     • The exchange rate is determined entirely by trading currencies in the forex market without State interference
   • Plays an important role in economic policy decisions
     • Deliberate depreciation
       • Can contribute to stimulate growth in net export
         • This macroeconomic tool does not seem to have generated desired effect

2. Imbalances

   • Growing imbalances
   • Countries with big surpluses
     • Currency reserves in central banks
       • China the biggest lender
       • Sovereign Wealth Funds
         • Risk aversion from the reserves
   • Some commodity exporters have faced appreciation, others depreciation
     • Depends on the inflation
   • Deficits
     • Need of finance from foreign capitals
   • Very different trends among european countries
     • European countries with surplus
       • Due to good competitiveness and higher savings through higher per capita income and older demographic
       • Maximum 6% of GDP
         • Higher leads to measures to boost domestic demand and benefit rest of EU countries
       • Can be bad for economy
         • Germany is an example
           • Fall in investments?
           • Low levels of consumption?
         • Harms medium-term growth?
   • Big upcoming reforms in emerging countries affects capital flows and imbalances

3. Countries with high I%

   • Signal of good economy
     • Companies borrow for high rates w/ big return