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Chapter 9

GMS 724 Chapter Notes - Chapter 9: European Exchange Rate Mechanism, De Jure, United States Dollar


Department
Global Management Studies
Course Code
GMS 724
Professor
HOWARD LIN
Chapter
9

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Chapter 9 - Exchange-Rate Arrangements
The Jamaica Agreement formalized the break from fixed exchange rates
o As part of this move, the IMF began to permit countries to select and
maintain an exchange-rate arrangement of their choice, provided they
communicate their decision to the IMF
o The formal decision of a country to adopt a particular exchange-rate
mechanism is called a de jure system
o The IMF surveillance program determines the de facto exchange-rate
system that a country uses
The IMF also consults annually with countries to see if they are acting openly
and responsibly in their exchange-rate policies
o Each year, each country notifies the IMF of the arrangement it will use,
and the IMF uses information provided by the country and evidence of
how the country acts in the market to place it in a specific category
The IMF requires countries to identify how countries base their exchange rate
mechanism, whether use a specific anchor or a monetary framework
o Some countries use an exchange rate such as the U.S. dollar as their
anchor
o Others use either monetary aggregate targets (such as M1 money
supply) or inflation targets
The IMF surveillance and consultation programs are designed to monitor
exchange-rate policies of countries and to see if they are acting openly and
responsibly in exchange-rate policies
Three Choices: Hard Peg, Soft Peg, or Floating
The IMF classifies currencies into one of three broad categories, moving from
the least to the most flexible
o If they have adopted a hard peg (12.2 percent of the total), they lock
their value onto something and don't change
o If they have adopted a soft peg (45.7 percent), they are pretty rigid but
not as rigid as the hard peg
o If they have adopted a floating arrangement (42.1 percent), their value
is based on supply and demand
Hard Peg
There are two possibilities for countries that adopt a hard peg
o One is like El Salvador, which has no separate legal tender but instead
has adopted the U.S. dollar as their currency
o Seven out of ten currencies in that category use the U.S. dollar as their
anchor
o A few other European countries use the euro as their separate legal
tender
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