Research Topics: Foreign Exchange Market Rates

Sample Essay Foreign Exchange Markets and the Exchange of Currency integration of world economic competition in the buying, selling and exchanging of products

The ACME has been acquiring and talking with the two different European firms: the JEL industries which headquartered in a country that is part of the European Union while the DBC industries headquartered in a European country that does not belong to the Union and does not use Euro as their primary currency. I recommend the organization or the firm outside the European Union Zone because it considers other currencies by not just using a primary currency like Euro. Because I believe that an industry which has the determination to be competitive worldwide doesn’t rely on involving in a certain kind of Union. Not just one currency can help boom and stabilize the economic industry. If an organization or industries wants to expand worldwide, they should also consider the currencies of other countries not just by using a Euro currency. For instance, DBC industries know that the absence of foreign exchange market rates and inconvertibility of domestic currencies will result to an impossible international trade and expansion. Meaning, the economic condition will deteriorate because of the isolation of a particular country from the international monetary. Running a business in a country outside the European Union will have the possibility to rise and expand worldwide. Eiteman, D. K., & Stonehill, A.I., & Moffett, M.H., (2004). Multinational Business Finance. Pearson Addison Wesley. In regards to this, the consideration of other currencies will open a portal of opportunities to the world which is the opportunity of buying and selling and exchanging of products.  Thus, creating a foreign exchange markets and the exchanged of currency is introduce which means that there will be a market-oriented economic reforms. Also the consideration of exchanging rates in the economy where my company belongs and engaged will be a great help. There is no common market and economic monetary union so you can expect that the competency is present. There is also a possibility for the company to sell the products with a deserving higher price and not just giving prices for the sake of the policies and activities that is being implemented. We all know that competition is always present not just in industries but of everything so why do I have to sacrifice the company’s products, when I know that it has the right and competitive quality like others. The best advantage for this is the integration of the company to the world economy. However, the disadvantages of this are the flexibility of changing the prices of the goods in the market is not a good sign for the producers or manufacturers. Maintaining the exchange rate at the wrong level can also cause harmful variations in a country’s consumption and resource allocation. The overvaluing of the exchange rate is also risky because it can contribute to inflationary pressure and should require a reversal of liberalization in domestic prices. Eiteman, D. K., & Stonehill, A.I., & Moffett, M.H., (2004). Multinational Business Finance. Pearson Addison Wesley. And if ever my company I acquired primarily sold its products within all countries of Europe, I will not change my decision on the way my company was designed. I know that people who belong to country under European Union says that it’s worth it because they had experienced the harmonized and balanced development of market activities. The corporate governance covers the agency theories, the composition and the control of boards of directors and the historical, cultural and institutional variables. But, we also have to consider that an international company that links worldwide differs from a domestic company because of the differences in culture, history and institutions, corporate governance, foreign exchange risk; political risk; and the need to modify domestic finance theories and financial instruments. No matter what, I will still hold and stand on the company’s ways and style in attracting buyers or consumers its policies, aims and the goal of the company for the good of the people. I believe that if a competitive and ambitious company wants to achieve its goals and aims it should start at the lowest level which is the getting of incomes from the products which is sold to the locale. But, how about selling their products outside a European Union for sure, the demand of their products will decrease due to its currency value in exchanging foreign rates. Grubacic, S. (2000). Real Exchange Determination in Eastern Europe. Atlantic Economic Journal. 24(9), 12-20. And if my company primarily exported its products to Far East nations and the U.S, well, much better for my company because through the products that were being exported there will be more opportunities and clients to come. Market demands will increase and the production also will increase thus, resulting to the addition of the workers. McCormick, M.J. (2002). A Primer on the European Union and its Legal System. Army Lawyer Credit:ivythesis.typepad.com

Sample Essay Foreign Exchange Markets and the Exchange of Currency integration of world economic competition in the buying, selling and exchanging of products

The ACME has been acquiring and talking with the two different European firms: the JEL industries which headquartered in a country that i...

Renminbi

Chapter 4   Presentation, Interpretation and Analysis of Data     Introduction   For the past decades, the efficiency of financial markets has been subject to numerous studies and debates. In general, the view of the practitioners, analysts and the public regarding the issue is divided into two. One group believes on the so-called Efficient Market Hypothesis, while the rest do not (2000). In spite of laid down evidences, no agreement has been reached.   Since the late 1970s, China has undertaken economic reforms that have liberalized agricultural production, allowed the growth of a dynamic private sector, and gradually opened the economy to international trade and foreign direct investment. (2002) As a result, China juxtaposed itself along the league of the fastest growing economies in the world. Nonetheless, Chinese policymakers face continuous pressure to improve economic performance in order to be at par with the recurring changes in world’s economic trends.    Analysts estimate that China needs to maintain annual growth rates even higher than the 9.5% average achieved in 1978-2000 in order to modernize the economy and create jobs for ten million workers that enter the labor force each year. (2002)   However, in the course of China’s economic development, the country’s financial sector encountered a number of inroads to its growth. Growth is constrained by the financial sector, which functions below potential because it supports unprofitable state-owned enterprises (SOEs). ( 2002) In this light, Chinese authorities have attempted to ease this constraint with policies that give greater play to market forces and encourage banks to engage in commercial banking, shifting away from their traditional role as suppliers of financing to SOEs. SOEs also are being restructured to improve their financial condition.   Even before China began economic reforms such as engaging with the WTO, its economic activity was dominated by SOEs, which geared production to meet development goals and which automatically received credit from the banking sector according to a national development plan. But once liberalization began, it became apparent that SOEs could not keep up with the needs of the evolving market economy. This is reflected in the analysis of  (2001) who revealed that SOEs are about 60% as efficient (as measured by value added), or profitable (as measured by operating profits to assets) as foreign-funded enterprises. Moreover, their low profitability leaves SOEs financially vulnerable. For example, interest coverage (the operating profit potentially available to cover interest expenses) in SOEs is as low as one-third that observed in major industrial countries. Firm-level data for listed enterprises suggest that Chinese enterprises cannot generate enough cash flow to pay interest on about 20 to 30% of their total debt. (2002) A moderate rise in interest rates or a moderate drop in sales could cause 40% to 60% of the debts of all firms to become unserviceable.   With regards to the economic condition of China, this paper will analyze the effects of exchange rate reforms in china and its implication to Renminbi, through this appropriate conclusions and eventually recommendations can be made. The data presented will come from economic reports and articles and from the surveyed financial analysts that are deemed to be helpful in the advancement of awareness concerning the subject.   This chapter presents the data gathered from the questionnaire and interviews conducted by the researcher with financial analysts. The general population for this study was composed of 50 individuals i.e. knowledgeable about the real economic status of China. These financial analysts were also interviewed. Basically, the findings of the study are presented in different sections.  Part One presents the perception of the respondents regarding Renminbi. Part Two discusses the analysis of interview regarding the perception of respondents towards the economic condition of China. The objective is to give information about exchange rates and how it affects countries.    The conduct of this study entails a detailed account of the demographic profile of the respondents.  It is assumed that the attributes of the respondents will influence their behaviour and answers on the survey questions.  Of particular significance to the achievement of the goals and objectives of the study – which is to be an instrument of analysis for the institution to gauge where it is now and where it is heading, thus what changes are to be made – is to be able to answer the following questions:    <li class="MsoNormal" style="text-align: justify; line-height: 200%"> How good or bad Renminbi has been doing against other currencies?</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> What is the state of currencies all over the world?</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> What are the problems of currencies nowadays?</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> How China reacts to changes in the exchange rate?</li> <li class="MsoNormal" style="text-align: justify; line-height: 200%"> What causes exchange rates to be altered? </li>     PART 1. Perception of Respondents regarding Renminbi             According to  (1978), the function of the exchange rate is to equate supply and demand. Exchange rate is much more than an ordinary price it is between the price structure of one country and those of all others, and thus between the national economy and the world economy. An inappropriate exchange rate affects the relation of domestic to foreign prices of a wide range of goods and services and to some extent the relation of one group of domestic prices to others. A substantially inappropriate exchange rate for a prolonged period would seriously disturb the economy.               For  (1978), exchange rates as the country’s international transactions are an integral part of its economy because it has a significant effect as they affect as they affect output and employment, prices and real income, and money and capital markets. From there, the primary function of the exchange rate is to help bring about such a pattern of international trade and capital flows. That function, it should be emphasized, is the same whether a country has a fixed par value or a freely fluctuating exchange rate for its currency.                         While  (1978) states that exchange rate is considered one of the most significant international economic developments. According to him, decades ago there had been breakdown of the system of adjustably pegged exchange rates on which the post-war international monetary system had been based and the widespread adoption of more flexible exchange rates. And by the fall by of 1975 there is an experience accumulated sufficient with the new system of flexible exchange rates to attempt a major effort at evaluation of the initial performance of floating rates.               In connection to this, Table 1 indicates the perception of respondents regarding the status of Renminbi. .     Table 1   5 4 3 2 1 Weighted Mean Interpretation Renminbi revaluation affects directly the economic condition of China 24 11 8 5 2 4.00 Agree The rapid build-up in China’s foreign exchange reserves should slow as a result of the revaluation this year of the Renminbi. 20 12 16 1 1 3.98 Agree With respect to Renminbi, China’s foreign exchange levels have global implications. 23 10 14 3 0 4.06 Agree Political issues in China significantly affect the Renminbi revaluation. 18 17 15 0 0 4.06 Agree The risk arising from foreign exchange operations and exposures whether long or short term are recognized in terms of effective systems of internal control must be maintained in order to identify, monitor and limit the extent and nature of their risks. 12 20 13 5 0 3.78 Agree With regards to renminbi revaluation, a rise in the value of China’s currency won’t cut the overall U.S. trade deficit, but would likely boost domestic prices. 14 15 16 5 0 3.76 Agree Revaluation of renminbi does not follow that that will lower the overall trade balance. 10 20 20 0 0 3.80 Agree Renminbi revaluation is an advantage to China’s economy. 15 15 17 1 2 3.80 Agree In accordance to Renminbi revaluation, China is equipped to defy external currency pressure. 13 13 17 5 2 3.60 Agree Revaluation is beneficial to the overseas holders of Renminbi assets. 15 10 23 0 2 3.72 Agree                 Table 1. The perception regarding the status of Renminbi revaluation and its impact on China’s economy provides a significant effect to the study considering that the subjects are financial analysts.               The Table above shows the result of the survey questionnaire of the respondents in regard to their perceptions. The columns 5, 4, 3, 2, and 1 signify the number of respondents who answered on a particular ranking score.  In statement number 1, 24 respondents answered 5, 117 for 4, 8 for 3, 5 for 2, and 2 for 1. The weighted mean column shows the mean answer of that particular question that is 4.00 and interpreted it as ‘agree’. The Table above shows that most of the respondents agreed on the given survey statements. All the statements from the survey were clear to the respondents. According to the respondents, Renminbi revaluation affects directly the economic condition of China.               Apparently, the respondents believed that the rapid build-up in China’s foreign exchange reserves should slow as a result of the revaluation this year of the Renminbi, which was illustrated by the 3.98 weighted mean.               In addition to this, understanding the nature of foreign exchange is vital to the development of the company since China’s foreign exchange levels have global implications.   Moreover, the respondents agreed that political issues in China significantly affect the Renminbi revaluation and the risk arising from foreign exchange operations and exposures whether long or short term are recognized in terms of effective systems of internal control must be maintained in order to identify, monitor and limit the extent and nature of their risks.   As viewed in the results of Table 1, most of the analysts believe that a rise in the value of China’s currency won’t cut the overall U.S. trade deficit, but would likely boost domestic prices since revaluation of Renminbi does not follow that that will lower the overall trade balance.   In addition to the findings, Renminbi revaluation is an advantage to China’s economy as perceived by the surveyed analysts and they also accepted the fact that China is equipped to defy external currency pressure. Revaluation is beneficial to the overseas holders of Renminbi assets.   PART 2. The Interview             The following presentation illustrates the analysis regarding the respondents’ interview. Basically, the interviewed subjects were asked regarding economic policies and Renminbi condition. From the interviewed personalities, they argued policy coordination and not only Renminbi revaluation in China should be given enough consideration in order to attain economic success. Thus, according to them, policy coordination occurs when countries agree to pursue economic policies intended to promote the welfare of all nations involved in the agreement. But when it comes with the welfare of all nations is concern different problems occur since every nation who is part of the agreement aims to gain over the other nations.     According to most interviewed financial analysts, one of the major problems identified for international policy coordination of China is whether the agreed outcome is sustainable. Let’s say revaluation of Renminbi. This problem of sustainability is also relevant to dynamic games. In this context the problem is that of time inconsistency. It will be a matter of time to answer such question in sustaining the policy agreement.   Thus, based on their perception, another potential problem with the coordination of monetary policy is that it can worsen the inflationary bias within each country. If the costs associated with this increased domestic inflation outweigh the gains due to policy coordination countries will prefer to act unilaterally. If one country expands its money supply in isolation then its exchange rate will depreciate causing the cost of imports to rise, and this stimulates inflation. If, however, monetary policy is coordinated, and all countries expand their money supplies simultaneously, then the exchange rate effects are less severe and so inflation is tempered. The costs of expansionary monetary policy caused by higher inflation are less for a coordinated expansion of monetary policy, than for an isolated expansion of monetary policy by one country.   Furthermore, knowing the correct model of the economy is another problem since every nation have different model of there own economy. Also, it is almost certainly true that no-one knows the “true” model of the economy. This basic uncertainty will clearly cause problems when governments attempt to coordinate their economic policies. With government’s using different models they may be unable to agree on the most appropriate agreement, and negotiations may break down.   A final problem associated with the policy coordination is that countries not involved in the policy agreement may react in such a way as to offset the gains from such an initiative.   Surely enough, the road towards a successful international economic policy coordination is a long road to take with many problems need to solve. Proper coordination for the benefits of every nation involve not for some nations is one of the key towards success.   Actually, the most of the interviewed analysts stated that Renminbi revaluation will have a significant effect depending on its amount.  Let say a small renminbi revaluation (i.e. 5% against the US dollar) will change very little. The possible result would be an augment in conjecture about an extra move, more capital flows into Asia, more buying of US dollars (and Treasuries) to try to offset these flows, more liquidity going into Asian equity markets and the risk of a fizz in asset prices in the region. On the other hand, a larger revaluation would possibly be seen as enough for now. Other Asian currencies that have not risen against the US dollar over the last year or so would rise broadly in line with the renminbi.     Synthesis Basically, the dilemma of the 1990s will be how quickly Chinese leaders can convince foreign investors that business conditions have stabilized and improved within the People’s Republic (2005). The challenge for the Chinese leadership is to develop long-term strategies designed to move ahead with economic reform while at the same time preventing social unrest and inflation from bringing chaos.   The question remains, will China’s leaders be able to bring back the momentum of 1987 through June 1989, whereby investment and trade boomed, without making radical changes in the political environment? Does Renminbi revaluation will help China’s economic progress? Sustained growth in foreign investment during the 1990s will not move forward without returning to the reforms, which were abandoned in mid-1989, and correcting internal business practices and further enhancing the investment climate (2005).               Apparently, it is important to note that the austerity program, which limited loans and credits, slowed but did not fully destroy the foreign investment momentum. In so doing, China reversed the decentralization of decision making authority at the provincial and local levels, centralizing more authority in Beijing. While a degree of recentralization was deemed necessary to curb inflation and to channel financial resources (loans and bank guarantees) and scarce materials into projects that were fulfilling national needs, as well as to stop unnecessary, luxury imports from entering the Chinese marketplace, the leadership apparently overreacted.               From the information gathered in the review of the relevant literature, particularly to case of China’s currency, the changes that have taken place in the People’s Republic of China since it opened its doors to the West have been dramatic, exceeding the expectations of the most optimistic China watchers.               China is plagued by continuing inflationary pressures, a shortage of foreign currency earnings, massive hidden unemployment, overpopulation, and an industrial base that, for the most part, remains antiquated. Exacerbating these problems are massive infrastructural needs, inadequate communication facilities, and segments of the bureaucracy resistant to change. However, leaders who resist change are finding it more and more difficult to maintain their positions, since the majority of citizens are pushing China to become a newly industrialized economy by the year 2000, or shortly thereafter, with the opportunity to increase the welfare of the masses.   China, like most countries, has a variety of financial institutions that play a significant role in foreign exchange activities and operations. While understanding the organizational structure and each organization’s function may be difficult, this understanding is essential for foreign investors who desire to operate businesses successfully in China. It is particularly true for those foreign investment projects that must deal with various Chinese governmental agencies on an almost daily basis.   While this dissertation  may serve as a basis for a general understanding of China’s governmental organizations that are involved in foreign exchange, a more thorough understanding can only be achieved through the experience gained by operations in that marketplace. Furthermore, the role of financial institutions in China is changing as the leadership gains experience in moving toward a more market oriented economy.         Chapter 5 Summary and Conclusions The focus of this study is to determine the perceptions of different financial analysts to the current economic condition of China. In particular, this research will focus on determining the impact of China’s currency revaluation. The secondary data will come from an extensive review of the literature on articles, journal articles, books, and magazines relating to Foreign Exchange and Monetary Policies. The study used random sampling as a method of choosing its population. Random sampling can be very useful for situations where you need to reach a targeted sample quickly and where sampling for proportionality is not the primary concern. Most sampling methods are random because they approach the sampling problem with a specific purpose in mind. Actually, the sample size would ensure the validity of the response that the researcher will be able to gather.  To determine the assessment of the respondents, the researcher prepared a questionnaire and a set of guide questions for the interview that he asked of the intended respondents. The respondents graded each statement in the survey-questionnaire using a Likert scale with a five-point scale wherein respondents were given five response choices.   Concurrently, the study employed both qualitative and quantitative research methods to ensure a flexible and iterative approach. During data gathering, the choice and design of methods are constantly being modified, based on an ongoing analysis. This allows investigation of important new issues and questions as they arise, and allows the investigators to drop unproductive areas of research from the original research plan. The researcher also uses percentage analysis, the mean and median analysis and analysis of variance to evaluate the collated data.   SUMMARY   America’s dollar is on the downfall. Asia’s dollar reserve is on the rise, especially China which ranks number 2 (2003) in the amount of its dollar reserve. Since China is one of the largest manufacturing countries in Asia, America has its eyes on it. With foreign investments on the rise, America is trying to call for a revaluation of the yuan (renminbi internally), they are trying to make the value of renminbi to a floating status.   Since China has more than a billion people, any adjustment to the value of renminbi will have a significant effect on international trade, as well as in China’s economic and social stability (2003). In 1994, China has been pegged to the US Dollar at a rate that is determined by the  ( 2003). Basically, the summary of the interview and survey to financial analysis in the previous chapter shows that renminbi revaluation might provide possible positive effect to China’s economy.   China has been continuously lowering its interest rate since 1996, as the central bank sees needed. But with the current situation where there has been a great inflow of renminbi to bank reserves, the People’s Bank of China is thinking of raising its interest rate to lower the inflow. Analysts agree that the US currency is doomed to decline thanks to its immense fiscal and trading deficits, but that the weakening needs to be carefully managed to prevent ructions (2003).   The value of dollar is declining; therefore, other currencies need to rise against the dollar to help balance the decline. But so far the only currencies strengthening against it and share the burden of the dollar, are Euro and Yen. And other currencies are not helping at all (2003).    The big danger is that these countries should suddenly wake up to the weakness of the currency and dump their huge holdings in US government debt securities. That would cause interest rates to jump in the US and trigger inflation. Difficulties in the world’s largest economy would quickly lead to problems in Asia and Europe, says  ( 2003).   While the low value of renminbi helps in the competitiveness of the country by giving cheap labor, the US economy suffers because US manufacturers can not compete with the cheap renminbi. With its consumer market, the US relies mostly on imports. And this movement does not alleviate unemployment problems in US.  “Should this pattern continue, the central bank will be confronted with the choice of an overheated economy, with its potential recessionary consequences, or a curtailing of dollar purchases,”  of Federal Reserve said in a speech to the World Affairs Council of Dallas. ( 2003). With US even raising an issue about China’s obligation to the World Trade Organization, it’s a wonder how China is coping up with all the pressure. Should China submit to this pressure, it should consider first the pros and the cons of the revaluation of the renminbi.  Even if China revaluates its currency, there is no assurance that new jobs would open in US. Also, if China raises the value of its currency, it would not be assured that the possible overheating of its economy would change. Any decision that China makes would still pass through the reaction of its people. And that its people would still be the ones to suffer or enjoy the outcome.   CONCLUSION             With respect to summary above, the consequences of the China’s Renminbi revaluation or devaluation are both in levels and rates, on the balance of payments in a cash-in-advance economy with finite horizons, endogenous capital accumulation and international capital immobility.  In general, currency revaluation induces a balance of payments surplus, whereas a sustained increase in the rate of revaluation produces, in principle, an ambiguous effect on the balance of payments.  The effect of the simple exchange rate revaluation or devaluation on the balance of payments relies upon the monetary approach mechanism, while the effect of the increase in the revaluation or devaluation rate depends on the current account determination of the money supply and the long run reduction of money holdings determined by the higher inflation.                The consequence if the Renminbi is really revalued is that in a domestic output is perfectly substitute with foreign output purchasing power parity holds.  The monetary authority depreciates the nominal exchange rate at a constant rate.  Therefore, the Renminbi revaluation rate coincides with domestic inflation assuming foreign inflation as being zero.  Money supply is determined by the balance of payments, since it adjusts to balance the supply of and the demand for foreign exchange.  Money is inserted into the economy through a cash-in-advance constraint imposed on consumption spending.                The overall consequence of the higher rate of revaluation or devaluation on money demand is, in principle ambiguous since the positive effect of the increased consumption may be outweighed by the negative effect of the higher inflation rate on the money consumption ratio.                                Credit:ivythesis.typepad.com

Renminbi

Chapter 4 Presentation, Interpretation and Analysis of Data Introduction For the past decades, the efficiency of financial...

CURRENCY EXCHANGE RATE SYSTEM

This piece of writing will going to present the Currency Exchange Rate System happening in some countries like US, China, UK, and other Asian countries (Japan, China, Hong Kong, Korea, etc) and how the floating of exchange rate system affects them. Without US retailing its own version, labor would not be motivated to earn in other countries and that is why most countries depend in US, except The China’s Central Bank which is unwilling to accept command from the US, partly some of inherent protection to Western imperialism, rather chose to act according to its own will state key findings in the paper. This argument is concretized how the government created their own internet search engine to filter down political and “destructive” global information.   Credit:ivythesis.typepad.com

CURRENCY EXCHANGE RATE SYSTEM

This piece of writing will going to present the Currency Exchange Rate System happening in some countries like US, China, UK, and other A...

THE CURRENCY EXCHANGE RATE SYSTEM: A GLOBAL VIEW

THE CURRENCY EXCHANGE RATE SYSTEM: A GLOBAL VIEW   Introduction             Government decision is two-fold in that it should ensure economic progress for public welfare while maintaining its culture from other nations.  These conflicting functions for the state enable it to initially guard its political boundaries, but ultimately persisting to relax this aspect in order for economic boundaries to propagate its uncultivated land.  In analogy, this situation had affected how it manages its currency exchange and its valuation.  Governments created monetary and fiscal policies to control foreign investments and local activities for the greater good of its constituents.  Thus, a country shift from fixed to floating exchange rate system is popular global stories since each of them have individual interest to perform well economically reflected in Balance of Payments.  Presented in this paper is the classic trade liberalization of China that has implications to its currency system.  There is also a discussion about the effects of floating exchange rate system to the BOP of United States and United Kingdom wherein hypothetical cases are discussed and given bearing to analysis.  Lastly, a conclusion is installed to illustrate key findings in the paper.                      The Case of China             It is the case of the already economic-awaken China.  By opening its doors to international commerce, its exchange rate system aroused concerns from the world commodity currency of United States Dollar.  Thus, the formerly fixed exchange rate Renminbi had to realize appreciation which is out of the conventional state-owned decision-making and policy.  The China’s Central Bank is unwilling to accept command from the US, partly some of inherent protection to Western imperialism, rather chose to act according to its own will.  Due to this, it is slowly but indirectly granting the wishes of the commodity currency through seemingly adapting some features of floating exchange rate system.  Perhaps, one of the unchallenged consequences of international trade, floating exchange rate system ensures that the economic performance of a nation will be reflected through its own currency.  As in the case of the reincarnated China, foreign direct and portfolio investments serve as key contributors to its fast surging economy.  A lively-active market entails inflation which in turn increases the local demand for the currency of both consumers (to buy the products) and producers (to finance capital requirements).  Hence, as supply and demand law posits, its currency faces appreciation. However, tagging the country as one of the best destinations of FDI, due to demand potential of its enormous consumers and labor-cost advantages, did little to tickle government authorities.  Emanated by 8.03 to 8.02 appreciation against the dollar, such minimal increase posted the highest gain of the currency since it began revaluing Renminbi to accord international market forces.  Can be viewed as highly conservative floating exchange rate system, it also recently allowed its major banks to reflect revaluation trends.  But why is China so conservative to embrace the “invisible hand” of currency valuation?  Is it purely political regimen to imply world power, protection of local producers/ consumers or simply adaptation flaws for a millennia-old centrally-planned form of governance? Probably, China does not want risks to emerge abruptly parallel to its abrupt adaptation of floating system.  It can lead to inflation and adverse effects to balance of payments which the state cannot act on readily because national forces widened into complex and ever-changing international forces.  Rather, the state wanted a smooth shift as it builds the necessary institutions to help its policies address the exchange rate issues in the future.  Thus, the gradual approach of China to freely float its currency in the international arena is preferred both for the benefit of its population and install supremacy of its government against other countries.  Local producers are given the time to obtain efficiency in its operations, as reflecting the US measure of the under-priced of Renminbi could mean more expensive export merchandise detrimental to its balance of payments.  In a similar way, consumers are provided with cues on what to expect to their wages and price level in the upcoming future, therefore, preventing public panic of any abrupt development.  Lastly, the state avoids its political ideals to be inflicted by other customs especially to affect the minds of its citizens.  This argument is concretized how the government created their own internet search engine to filter down political and “destructive” global information.         Effects of Floating Rate in the Balance of Payments             In the case of United States, allowing the market to determine its exchange rate implied stability of currency. Since, Bretton Woods, US government started to intervene in foreign exchange to signal if the value of its currency is inconsistent with economic indicators.  However, starting 1990s, this intervention became minimal while floating rate seemed to correctly economic performance of the country.  A benefit from hands-off approach is that trading partner’s confidence is enhanced regarding the price of US exports and in the same manner the latter payment for the former imports.  Trade is stimulated for the advantage of cross country exchange of goods and services.  As a result, the Balance of Payment in terms of current account for both of them is skewed in the positive values.             On the other hand, the lack of government intervention in currency value could discourage its labor to work abroad.  This can happen when a certain country that uses fixed system largely decreases the value of its currency for some economic purposes.  Without US retailing its own version, labor would not be motivated to earn in that country which is previously  be exchanged with more dollars when they go home.  The loose of motivation and turn-over of overseas employment would then reflect low unilateral transfers from worker remittances that would have been realized when workers abroad gives back a large portion of their foreign earnings to their home country.  In effect, this situation limits the capability of current account to increase, thus, also affecting the positive net gain of BOP.             Focusing on the capital accounts, floating system could undermine the real value of local assets, thus, accepting undervalued portfolio investments from foreigner-investors.  Without local government’s intervention in currency valuation, regional clusters like Asian countries (Japan, China, Hong Kong, Korea, etc) could have cooperative effort to control the dollar in the international market as these countries are equipped with enough foreign currency reserves.  They can buy US stocks and could own US assets at undervalued price and could profit by selling these at a premium or when the period comes when the US government smells the collusion.  Until this recognition, capital accounts in securities and bonds are understated resulting to negatively skewed total of BOP.             Finally, official reserves like foreign currency reserves could also be inappropriately and inefficiently applied when needed in emergency situations.  When US will wait for a substantial change in dollar performance in the world market before the government will act on a threat of say, oil price hike announced by the Middle East, it could be too late to restructure its monetary policy as the market did not see what is in the eyes of the US government.  The tendency of the market to be complacent with inter-government relations, especially when conflict between countries are held in indirect and non-obvious way, will leave US without enough foreign currency reserve (preferably currency of Saudi Arabia or Iran) to hedge the conflict-led oil increase.  And simply, it will loose a lot of dollar that will put greater pressure to approach negative BOP due to the outflows in trade payments.              Unlike other countries that replaced gold as their country’s tool to influence their currency, United Kingdom remain to emphasize holding their gold reserves instead.  In fact, it had auctioned gold accumulation.  The country invests in international holdings such as foreign currency assets to have more money to hedge undue fluctuations in the currency market.  With this, it operates just like US that it possesses some degree of control of its own currency while guarding its own from others.  This aim has substantial liquidity and prevents dependence from dollar instead to sterling have vast implications for the country and the trading partners with regards to BOP.             Since sterling is dependent from the performance , a basket of currencies, economic recession or government intervention of a single or maybe a couple of countries that have no substantial effects to the market value of its currency.  Thus, UK BOP will continue to stabilize in current levels in an event that currency concerns of one trading country ensued.  If that country’s currency appreciates, UK’s relation to other trading partners will not be affected because UK currency is stable.  Thus, BOP will not be shaken off substantially due to minimal looses of sterling to pay imports of that country.             However, these diverse international indicators adversely affect UK’s ability to recognize currency problems in advance as it purely based its decision due to market results.  Unlike other developing countries like Philippines who is highly dependent to US currency performance and accepted its currency to be a term currency of the dollar, UK could slip to sudden currency trap that could have substantial sacrifice to its BOP.  Say, an oil price increase is again initiated by Middle East suppliers; it has to determine the action of the majority of the countries before it will act.  On the other hand, Philippines will only have to obtain substantial feature of US policies and currency movements to be able to have the most logical, perhaps, strategic response to oil inflation.  As a result, emergency situations can bring huge current account outflows from the coffers of UK Treasury.  Undoubtedly, this fact could be one of the reasons why its government tries to own optimal value of foreign assets to hedge any currency fluctuations in the future.                  Conclusion             Wealthier countries have the ability to obtain substantial amount of foreign reserves to hedge unintended fluctuations in the world market.  This inequality of liquidity makes poorer countries dependent to them in their economic judgment.  More appropriately, poor countries acting like so when the wealthy counterpart is an important trade partner.  As a result, its floating rate performance will have the same direction as the wealthy one.  The problem is in the event of global recession, these poorer countries will not be saved by their partners’ mere currency harmony rather it involves the former to save its currency within its own borders.  Thus, there is little and partial advantages of both fixed and floating system for the poorer one.  Trade liberalization at the international level demand its local producers to be efficient and technologically competitive to push the local BOP upward while the government is duty-bound to replenish foreign reserves for future contingencies. Globalization means independence and competitiveness of both currency and national economy.  As China handles its global position, poorer countries should have the billion dollar reserves in their Treasury to obtain not only economic security but also national identity.           Bibliography   Book     Periodical     Electronic Sources Credit:ivythesis.typepad.com

THE CURRENCY EXCHANGE RATE SYSTEM: A GLOBAL VIEW

THE CURRENCY EXCHANGE RATE SYSTEM: A GLOBAL VIEW Introduction Government decision is two-fold in that it should ensure e...

Task: A Currency Board is a particular form of a fixed exchange rate policy. Discuss the advantages and disadvantages of a Currency Board in relation to the current global economic environment.

Introduction An exchange rate specifies the number of units of a given currency that can be purchased for one unit of another currency (Baumol, W & Blinder, A 2004).  Exchange rates appear in the financial sections of newspaper each day. Basically, the exchange rates are pertaining to Foreign Exchange rates. As Sloman, J & Sutcliffe, M (2001) stated, Foreign Exchange pertains to currency and money claims, such as bank balances and bank drafts, expressed in the equivalent value in foreign money. Thus, a pound sterling note is money in the United Kingdom, but is foreign exchange in the U.S. A deposit of 00 in an American bank to the account of a French company constitutes that amount of foreign exchange in France. The term foreign exchange is also used to refer to transactions involving the conversion of money of one country into that of another or to the international transfer of money and credit instruments (Sloman, J & Sutcliffe, M 2001). The use of foreign exchange arises because different nations have different monetary units, and the currency of one country cannot be used for making payments in another country. Because of trade, travel, and other transactions between individuals and business enterprises of different countries, it becomes necessary to convert money into the currency of other countries in order to pay for goods or services in those countries. Basically, Heij, Franses, Kloek, & de Boer, (2004) argued that the transfer of money values from one country to another and the determination of the price at which the currency of one country will be surrendered for that of another constitute the main problems of foreign exchange. Exchange Rate, in relation to foreign exchange of money is the price of a country’s currency expressed in terms of one unit of another country’s currency. Ordinarily, and without government restrictions, the rate of exchange, or the price of the currency of one country in terms of that of another, will depend on overall supply and demand and on the relative purchasing power of the two currencies, that is, on the competitive position of the two countries in world markets. Gold and wealth tend to flow from countries that buy more than they sell abroad. Since 1973 major currencies have fluctuated in importance, but those of West Germany, Switzerland, and Japan have remained fairly strong. At times, speculation in foreign exchange by dealers, brokers, or others becomes a major influence on exchange rates according to Heij, Franses, Kloek, & de Boer (2004).  Exchange rate policy has two dimensions (Heij, Franses, Kloek, & de Boer 2004): the extent of convertibility and the specific institutional arrangements that determine the day-to-day setting of exchange rates. Asia, including Japan, has a history of procrastination in freeing up trade in assets and financial services. This reluctance to some extent reflects the high degree of financial repression prevalent in Asian financial markets, the absence of effective sterilization tools, and the poor quality of balance sheets in the aftermath of a long period of mismanaged finance. The good macroeconomic performance of Asia has a surprising and perhaps strange counterpart in the neglect of financial markets as opposed to forced savings mechanisms. Thus, the lack of an open capital account also reflects a supporting policy for domestic management of the macro economy. It also, of course, reflects a determination to capture domestic savings for domestic investment. It might perhaps be claimed that restrictions on convertibility have worked in the past-that there was more investment and growth, and fewer disturbances were imported via the capital account. That view, of course, expresses the underlying sense that capital movements are mostly a nuisance. If countries with high domestic saving rates had accompanying high rates of efficient investment, that would not be altogether implausible. Of course, if saving is inadequate or investment is inefficient, there can be little support for closing the capital account to the market. According to McDonald, IM (1995), even where a country can plausibly claim high saving and efficient investment, failure to implement the decentralization required for an open capital account becomes increasingly difficult to defend. If transition to an open market is accepted in principle, steps should be taken to put it into practice. An appropriate regulatory structure has to be established and pre-emptive clean-up operations in the balance sheets of existing institutions have to be carried out. There seems little reason to delay an inevitable process.  From this discussion, this paper will be discussing the issues related to fixed exchange rate policy and its advantages and disadvantages in relation to the current global economic environment.   Discussions From the end of World War II until August 1971, the world was on a fixed exchange rate administered by the International Monetary Fund (IMF) (Soper, J 2004).  Under this system, the U.S. dollar was linked to gold ( per ounce), and other currencies were then tied into dollar (Soper, J 2004).  Exchange rates between other currencies and the dollar were controlled within narrow limits but then adjusted periodically.  For example, in 1964 the British pound was adjusted to .80 for £1, with a 1 percent permissible fluctuation about this rate. As for its advantages, fixed exchange rates are able to provide a source of consistency, and the governments are no longer permitted to utilize competitive reductions or depreciations just to encourage exports. Accordingly, being members of the International Monetary Fund, the nations are allowed to uphold the manipulations and controls on operations in the capital values which are considered as the net flow of both domestic and foreign acquisitions of their assets (Feldstein, 1998). As stated in International Monetary Fund (1987), the mission of the IMF in this system is to promote international cooperation and to supervise enforcement of the rules. This mandate includes monitoring the compliance of member countries with the fund’s Articles of Agreement and periodic consultations with their governments about their macroeconomic policies (James, 1996). The fund also extends financial assistance to different nations which are the members of the IMF with balance-of-payments deficits. However, the fund’s resources are meant to be provided on an interim basis while governments address the underlying causes of the external disequilibrium and enact policies to correct it. Conditionality is the mechanism whereby the IMF ensures that nations employ the necessary adjustments. In this regard, the provision of the assistance of the International Monetary Find is considered as dependent on a government’s agreement to a program of specific policies, and its subsequent adherence to that program. Credit is disbursed in periodic installments as a government fulfills its obligations; otherwise a program may be suspended or terminated. When the International Monetary Fund started its operations with the nations with balance-of-payments deficits during the 1950s, the IMF is in need pf economic models coming from the external sector that would let it to recommend the governments about the most efficient and appropriate policy measures (Polak, 1998). One of the initial planning tools established by the International Monetary Fund was the so-called “financial programming”. This program observes the balance of payments as a monetary trend. Herein, the increase in national credit directs to an increase in spending and a deficit in the balance of payments. From this, we may argue that the fluctuations in exchange rates occur because of the changes in supply of and demand for dollars, pounds and other currencies.  These supply and demand changes have two primary sources.  First, changes in the demand for currencies depend on changes in imports and exports of goods and services.  For example in the current global financial setting, some of U.S. importers must buy British pounds to buy British goods, whereas British importers must buy U.S. dollars to pay for U.S. goods.  If U.S. imports from Britain exceeded U.S. exports to Britain, there would be a greater demand for pounds than for dollars, and this would drive up the price of the pound relative to that of the dollar.  Thus the current exchange rate of pound may increase compared to dollar.  The U.S. dollar would be said to be depreciating, because a dollar would now be worth fewer pounds, whereas the pound would be appreciating. And from this, the implementation of fixed exchange rate in a form of currency boards creates an option to countries to avoid inflation (Hoguet, GR 2001).  A country ties its currency to a low-inflation currency, makes a firm commitment, and, as a result, achieves low inflation. However, it is important to remember that the fixed exchange rate gives roughly the same rate of inflation only in tradable goods, which provides the price anchor. The overall inflation rate is, however, an average of tradables and nontradables. According to Hoguet, GR (2001), when inflation in tradables is fixed, the inflation rate of nontradables will be determined by the relative productivity growth in nontradable sectors of goods and services vis-à-vis tradables. This explains why a currency board country may have relatively high inflation although its currency is pegged to a low-inflation country’s currency. For example, high productivity growth in the nontradables sector was one of the reasons for high inflation in Hong Kong during the 1983–95 period. As for its disadvantages, the lack of credibility or doubt about it explains, to a large extent, why currency boards are subject to speculative attacks (Dumas & Solnik 1995). From this point of view, one must ask how financial market participants view the monetary policy actions: Do they perceive them as temporary and justifiable (the expansion of the monetary base through the central bank’s discount window despite declining foreign reserves), or as something similar that has led to devaluation (or a series of devaluations) in the past? It seems that formal institutions or laws cannot remove skepticism about governments’ ability to carry out commitments if they have repeatedly been broken in the past. Even with a strong macroeconomic performance, consolidating credibility may take time. In addition to this, when currency boards are subject to speculative attacks, devaluation can be avoided, but usually only at the cost of financial crisis. This was the case, for example, in America. The combination of a fixed exchange rate, a current account deficit, large short-term international debt, and a weak banking system explains why America became the victim of the housing bubble, even though it had a currency board regime. Consequently, America suffered from capital outflow. At the end, the country may still avoid a full collapse of confidence, but suffered from a deep financial crisis, recession, and high unemployment. An additional observation related to devaluation is that in principle, if there is no explicit or implicit currency denomination mismatch, then the devaluation improves banks’ balance sheets. The devaluation can improve balance sheets if you have an external shock and a certain loss becomes nonperforming, so devaluation can liquidate the debt. Devaluation also helps stimulate the demand for deposits, and it can prevent runs of banks. Apparently, labor market flexibility and coordination is crucial under the currency board regime. Given the argument of labor market flexibility, the exchange rate should be fixed in a country/within an area in which there is factor mobility (labor and capital). However, this is easier said than done: How to bring about labor market flexibility? Would it actually be possible to convince politicians or trade unions that in the long run workers are going to be just as well off with nominal wage flexibility downward as by sticking to nominal wage levels while nominal demand declines when there is, for example, a capital outflow? Another crucial question related to currency board economies is how to deal or avoid credit squeeze/capital flights which is now present in United States of America? In United States of America, lowering the banks’ reserve requirements during the run of deposits make help them. Actually, the example of Hong Kong shows in turn that modifications in the regulatory structure can reduce the need for a lender of last resort. In addition, permitting the internationalization of the financial sector can help both to reduce the vulnerability of banks to negative external shocks and to smooth out capital flows (because foreign-owned subsidiaries can draw from credit lines to their parent banks when confronted with negative external shocks). A country can avoid capital inflow–outflow shocks, to some extent at least, by also making a government run on a budget deficit or by borrowing abroad. Indeed, some fiscal flexibility has proved to be useful under the currency board regime. In case of adverse-terms-of-trade shock or a capital outflow problem, it helps if a government can engage in temporary fiscal expansion, which could involve more foreign debt. This would offset, partly, the domestic deflationary effects resulting otherwise from the currency board arrangement. However, not all countries have permanent access to the international capital market. Given this, a government might find it useful to have a systemic liquidity policy, which would take into account the short-term liabilities of both the private and the public sector, in both local and foreign currency. All in all, there seems to be a some kind of trade-off between the use of reserves to support convertibility and maintain credibility or to support the banking system. Can a country have a currency board with a credible commitment to a fixed exchange rate, and simultaneously enough room for maneuvering in terms of banking and monetary policy? Perhaps with high enough excess reserves and access to credit, a country could actually have it both ways. From the discussion and with regards to the current global financial status, we may say that the financial crisis in America, EU integration and future enlargement may raised a whole new set of questions related to the future perspectives of the currency boards. In particular, we are quite reluctant whether a currency board is an appropriate monetary framework for joining the EU, and, eventually, for participation in the euro zone. In general, there is no obvious reason why a central bank that runs a currency board should not be in a position to fulfill all the requirements the Treaty on European Union lays down in the area of central bank independence. In regards to price stability as the primary objective of central bank policy, a currency board has no policy tools at its disposal to directly fight inflation. However, empirical evidence has shown that a currency board tends to deliver low inflation or even price stability. Monetary policy cooperation among EU countries is based on the existence of market-based monetary policy instruments, and on their effective use, if the need arises. Under a pure currency board regime, there is no (active) monetary policy.   Conclusion For our conclusion, we may argue that a currency board country cannot fully participate in an institutionalized exchange rate cooperation of a standard EU type, which requires flexible use of interest rates. Since a currency board does not allow for any direct control of price level and interest rate developments, meeting the monetary convergence criteria can also become more complicated. So far, Lithuania is the only Eastern European currency board country that has officially announced the exit program. Technically, exit would mean moving away from the strict concept of a currency board and loosening of the backing rule, thereby building up more room to act as a lender of last resort in any future crisis. However, the main problem related to exit is that of credibility. A lot will depend on how well the monetary authorities deal with their new monetary freedom. To conclude, given the experience with and effects of financial crisis from United States of America, turbulence in worldwide capital markets, transition in Central and Eastern Europe, and EU integration, the appropriateness and long-term viability of currency boards will require continuous monitoring and reassessing in the years to come.   References: Baumol, W & Blinder, A 2004, Economics: Principles and Policy, 10th edn., Thomson South-Western, Ohio. pp. 55-90   Dumas, B & Solnik B 1995, “The world price of foreign exchange rate risk.” Journal of Finance (50), pp. 445-479.   Feldstein, M 1998, “Refocusing the IMF.” Foreign Affairs 77 (2): pp.20–33.   Heij, C, Franses, P, Kloek, T & de Boer, P 2004, Econometric Methods with Applications in Business and Economics, Oxford University Press, Oxford. pp. 48-63.   Hoguet, GR 2001,  Benchmark Blues. The International Monetary Fund Vol. 15, p. 44.   International Monetary Fund (1987). Theoretical Aspects of the Design of Fund Supported Adjustment Programs. IMF Occasional Paper no. 55. Washington, DC: IMF. p.1   James, H (1996). International Monetary Cooperation since Bretton Woods. Washington, DC, and New York: IMF and Oxford University Press. p.1.   McDonald, IM 1995, Macroeconomics. 2nd Ed. Brisbane: Jacaranda Wiley. pp. 265-281.   Polak, J.J. (1998). “The IMF Monetary Model at 40.” Economic Modeling 15, no. 3: pp. 395-410.   Sloman, J & Sutcliffe, M 2001, Economics for Business, 2nd edn., Pearson Education, London. pp. 56-59   Soper, J 2004, Mathematics for Economics and Business: An Interactive Introduction, Blackwell Publishing, Massachusetts. pp. 99-264.   Credit:ivythesis.typepad.com

Task: A Currency Board is a particular form of a fixed exchange rate policy. Discuss the advantages and disadvantages of a Currency Board in relation to the current global economic environment.

Introduction An exchange rate specifies the number of units of a given currency that can be purchased for one uni...