the implications of real exchange rate targeting for the behavior of real output, the domestic real interest rate, trade account, net foreign asset holdings, and the inflation rate. However, fixed exchange rates have disadvantages as well. Before looking at these disadvantages, question some of the advantages of fixed exchange rates: Questionable price stability: A metallic standard is considered to promote price stability. However, some studies indicate that the gold standard era experienced large fluctuations in the Disadvantage of fixed exchange rates. 1. Conflict with other macroeconomic objectives. To maintain a fixed level of the exchange rate may conflict with other macroeconomic objectives. If a currency is under pressure and falling – the most effective way to increase the value of a currency is to raise interest rates. Advantages and disadvantages of exchange rate targeting 1. Provide a nominal anchor 2. Reduce currency risk component 3. Prevents discretionary policy 4. Simple, clear, transparent: understood by agents thus leading to lower inflation expectations 5. May lead to economic climate where price stability takes important role 6. Useful when markets and Under a floating exchange rate system, however, countries are more insulated from other countries’ macroeconomic problems. A rising U.S. inflation instead depreciates the dollar, curbing the U.S. demand for European goods. Floating exchange rates also have disadvantages: Higher volatility: Floating exchange rates are highly volatile. Additionally, macroeconomic fundamentals can’t explain especially short-run volatility in floating exchange rates.
Essay title/Question number: Compare and contrast the advantages and disadvantages of three nominal anchors that could be adopted by a Central Bank. Discuss why you think asset prices should or should not be adopted as a target of a monetary policy.
the implications of real exchange rate targeting for the behavior of real output, the domestic real interest rate, trade account, net foreign asset holdings, and the inflation rate. However, fixed exchange rates have disadvantages as well. Before looking at these disadvantages, question some of the advantages of fixed exchange rates: Questionable price stability: A metallic standard is considered to promote price stability. However, some studies indicate that the gold standard era experienced large fluctuations in the Disadvantage of fixed exchange rates. 1. Conflict with other macroeconomic objectives. To maintain a fixed level of the exchange rate may conflict with other macroeconomic objectives. If a currency is under pressure and falling – the most effective way to increase the value of a currency is to raise interest rates. Advantages and disadvantages of exchange rate targeting 1. Provide a nominal anchor 2. Reduce currency risk component 3. Prevents discretionary policy 4. Simple, clear, transparent: understood by agents thus leading to lower inflation expectations 5. May lead to economic climate where price stability takes important role 6. Useful when markets and
One country that is loosening its fixed exchange rate is China. It ties the value of its currency, the yuan, to a basket of currencies that includes the dollar. In August 2015, it allowed the fixed rate to vary according to the prior day's closing rate. It keeps the yuan in a tight 2% trading range around that value.
Disadvantage of fixed exchange rates. 1. Conflict with other macroeconomic objectives. To maintain a fixed level of the exchange rate may conflict with other macroeconomic objectives. If a currency is under pressure and falling – the most effective way to increase the value of a currency is to raise interest rates. Advantages and disadvantages of exchange rate targeting 1. Provide a nominal anchor 2. Reduce currency risk component 3. Prevents discretionary policy 4. Simple, clear, transparent: understood by agents thus leading to lower inflation expectations 5. May lead to economic climate where price stability takes important role 6. Useful when markets and Under a floating exchange rate system, however, countries are more insulated from other countries’ macroeconomic problems. A rising U.S. inflation instead depreciates the dollar, curbing the U.S. demand for European goods. Floating exchange rates also have disadvantages: Higher volatility: Floating exchange rates are highly volatile. Additionally, macroeconomic fundamentals can’t explain especially short-run volatility in floating exchange rates. This short revision video looks at some of the key advantages and disadvantages of a country operating with a free floating exchange rate (currency) system. - Exchange-rate targeting directly keeps inflation under control. What are the key advantages of exchange-rate targeting as a monetary policy strategy? (Check all that apply.) what are the disadvantages of currency boards over monetary policy that only uses exchange-rate target? However, fixed exchange rates have disadvantages as well. Before looking at these disadvantages, question some of the advantages of fixed exchange rates: Questionable price stability: A metallic standard is considered to promote price stability. However, some studies indicate that the gold standard era experienced large fluctuations in the Monetary policy refers to the actions taken by a country's central bank to achieve its macroeconomic policy objectives. Some central banks are tasked with targeting a particular level of inflation.
