EXCHANGE RATE REGIMES

MONETARY ECONOMICS

Content

Short History of the International Monetary System

Fixed vs Flexible Exchange RatesOptimal Currency AreaIssues: - Trilemma (Forssbaeck and Oxelheim, 2006) - Gold Dinar as a common currency of OIC countries? - Can Interest Rate policy be used to defend falling exchange rate?

History of International Monetary System

1880s – WWI: Gold Standard - Every country at fixed e-rate with gold.WWI – 1940s: Interwar Gold-Exchange and Dirty Float - WW I: countries printed money - later, returning to old parity was too hard (too much contraction needed). - UK did return to gold. - Others pegged to a mixture of gold and foreign exchange. - Overall, failed attempts to restore credibility of the gold standard. - 1930s & Great Depression: most countries abandoned their pegs.

History of International Monetary System

1945-1971: Bretton Woods - dollar pegs to gold & other countries peg to the dollar - US plays central role: monetary policy affects all other countries - 1960s: dollar depreciation countries request gold US lost gold reserves 1971 Nixon closed the gold window.1970s: Floating Exchange rates, oil shocks and stagflation1979: ERM in Europe and eventually EURO in 19991980s --: Developed: free or managed floats Developing: fixed-exchange rates for stability and credibility

Fixed Exchange Rate Regime

Fixed Exchange Rate Regime

Fixed Exchange Rate Regime

Fixed versus Flexible

Impossible Trilemma

Common Currency Area

THE EURO….

Maastricht Criteria 1991

EU Countries

DISCUSSION OF ISSUES

Trilemma (Forssbaeck and Oxelheim, 2006)Gold Dinar as a common currency in OIC Countries? Lee, G. H. Y. (2011), Gold Dinar for the Islamic Countries? Economic Modeling, 28, 1573-1586.

Can Interest Rate be used to defend falling exchange rate? Dekle, R., Hsiao, C. and S. Wang, (2002), “High Interest Rates and Exchange Rate Stabilization in Korea, Malaysia, and Thailand: An Empirical Investigation of the Traditional and Revisionist Views,” Review of nternational Economics, 10(1), 64-78.