Fixed FX Regimes
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Transcript of Fixed FX Regimes
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Fixed FX Regimes
FNCE 4070 – Financial Markets and Institutions
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Floating FX Regimes
• The value of a currency is allowed to fluctuate against all other currencies.
• The USD floats against most major currencies
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Fixed FX Regimes
• In a fixed FX regime a currency is pegged relative to the value of another currency (the anchor currency) or basket of currencies
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Recent Headlines
• Danish Central Banker: Negative Deposit Rate Successful So Far (1 September 2012 WSJ)
• RBC Offers Negative Interest Rates on Danish Krone, Swiss Franc (9 October 2012 Bloomberg)
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Intervention in a Fixed Exchange Rate System
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Monetary Policy for a Pegged Currency
• Generally speaking a country that ties its exchange rate to a currency of a larger country loses control of its monetary policy.– If the larger country purses a more contractionary
monetary policy and decreases its money supply then the smaller country will have to do the same.
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The Euro – Convergence Criteria
• In order to join the Euro there were strict criteria– A debt to GDP ratio of less than 60%– Government budget deficits had to under control– Inflation within a certain band– Interest rates had to be close to European average– Exchange rate stability
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Gross Government Debt in Europe 1997-8
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European Government Surpluses 1997-8
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Greek Trade Deficit 1988 to present
19761977
19781979
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
0
5,000,000,000
10,000,000,000
15,000,000,000
20,000,000,000
25,000,000,000
30,000,000,000
35,000,000,000
40,000,000,000
45,000,000,000
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German and Greek Interest Rates
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 20000
5
10
15
20
25
30
35
GermanyGreece
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Greek Drachma vs Deutsche Mark
19691970
19711972
19731974
19751976
19771978
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
0
20
40
60
80
100
120
140
160
180
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Greek 10 year Government Bond Yields
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Germany 10 year Government Bond Yields
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Present Value of $2,000 paid monthly for 30 years
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22%$0.00
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
$700,000.00
$800,000.00
Present Value
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Greece Balance of Trade 2001-present
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Greece Current Account – includes foreign aid
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House Prices In Greece(1997 – prices are 100)
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Greek Government External Debt
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Target Balances - Europe