FINS3616 Lecture 2: FINS3616 Week 2
6 Sep 2018
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Market forces set rates unless excess volatility occurs. Then, central bank determines rate: target-zone arrangement. Market forces constrained to upper and lower range of rates. Members to the arrangement adjust their national economic policy to maintain the target. Central bank will intervene when exchange rates hits ceiling or floor and make the xr flat until it eventually falls or rises: fixed rate system. Ceilings on direct foreign direct insurance: hybrid system: switches between fixed rate and managed floating regimes, the trilemma of xr systems: Goals: stable xr, independent monetary policy, capital market integration or free flow of capital. Impossible trinity: one can achieve two of the three goals, but it is impossible to achieve all three of them: gold standard and international trade. Gold standard can automatically balance the trade flows between countries. See the image above on the left for the illustration of the system: brief history of international monetary system.
