International Economics - Exchange Rate Systems and Currency Crises

Flashcards covering exchange rate practices, systems, and currency crises based on Chapter 15 of Robert Carbaugh's International Economics.

Floating exchange-rate system

A system where currency prices are established daily in the foreign-exchange market by market forces of demand and supply without government restrictions.

Pegged exchange-rate system

A system where a currency is fixed against a standard of value such as a single currency, a basket of currencies, or gold (though gold has not been used since $1971$).

Impossible trinity

An economic principle stating that a country can only maintain two of the following three policies: Free capital flows, a fixed exchange rate, and an independent monetary policy.

The Impossible Trinity: Hong Kong

A case where the region allows free capital flows and a fixed exchange rate with the U.S. dollar, but sacrifices an independent monetary policy.

The Impossible Trinity: China (Pre-2005)

A case where the country maintained a fixed exchange rate and an independent monetary policy by setting restrictions on capital flows.

Key currency

A currency that is widely traded on world money markets, demonstrates stable values over time, and is widely accepted as a means of international settlement.

Official exchange rate

A rate determined by comparing the par values of two currencies under a fixed exchange rate system.

Exchange stabilization fund

A fund held by monetary authorities used to defend the official exchange rate through the purchase and sale of foreign currencies.

Fundamental disequilibrium

A long-term situation where the official exchange rate and the market exchange rate move apart due to changes in economic conditions like income levels, tastes, and technological factors.

Currency devaluation

A legal redefinition of a currency's par value downward to counteract a payments deficit under a fixed exchange rate system.

Currency revaluation

A legal redefinition of a currency's par value upward to counteract a payments surplus under a fixed exchange rate system.

Bretton Woods System

A semi-fixed, adjustable pegged exchange-rate system established in $1944$ where currencies were tied to the U.S. dollar or gold and could be repegged up to $10\%$ without IMF permission.

Clean float

A market solution where free market adjustments result in currency depreciation or appreciation without central bank interference.

Dirty float

A situation where central banks interfere in the market to influence the exchange rate, preventing supply and demand from achieving an equilibrating role.

Leaning against the wind

Intervening in exchange markets to reduce short-term fluctuations without attempting to adhere to a specific long-term target rate.

The Crawling Peg

A system involving small, frequent changes in a currency's par value to correct balance-of-payments disequilibrium, combining floating flexibility with fixed stability.

Currency manipulation

The purchase or sale of a currency by fiscal or monetary authorities to influence its value, often to make exports cheaper and foster internal growth.

Currency war

A destabilizing battle where countries compete against one another to achieve the lowest exchange rate for competitive advantage.

Currency crisis (Speculative attack)

A situation where a weak currency experiences heavy selling pressure, often leading to sizable losses in foreign reserves and a potential decrease in GDP growth by $6\%$ or more.

Capital controls (Exchange controls)

Government-imposed barriers on international transactions, such as restrictions on foreign savers investing in domestic assets or domestic savers investing in foreign assets.

Currency board

A monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed rate, operating without discretionary powers.

Full dollarization

The elimination of a domestic currency and its complete replacement with the U.S. dollar, as seen in places like Ecuador and Puerto Rico.

Special Drawing Right (SDR)

An international reserve asset created by the IMF, consisting of a basket of four currencies.