Mercury Athletic Essay example

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke and Schuler, 2002). With this fixed exchange rate, the Argentinean government was hoping to preserve the value of their currency and stabilize inflation. The peg was initially successful, as it cured hyperinflation that occurred at the end of the 1980s and provided price stability needed for economic growth in the early 1990s. However, by the late 1990s,

An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

Throughout 1994, Mexico lost significant amounts of reserves trying to stabilise the exchange rate. In 1989 the current account deficit was US$6 billion; by 1991 it had grown to US$15billion, before swelling to approximately US$20billion 1992 and 1993. However, after losing US$1.5billion in reserves over three days in early December 1994, the Government decided to depreciate the Peso by approximately 15%. Within days the Peso plummeted in value as the Government abandoned its new peg, sending the country into the 1994 Mexico financial crisis (Joseph & Whitt 1996).

As of now China is giving aid to you in exchange for free oil, this arrangement is creating more harm than good as Venezuela is not selling enough of its oil and is loosing more in this deal in the long run, Venezuelans currently pay next to nothing for gas and one U.S. Penny now purchases about five gallons of gas in Venezuela. Loosing foothold in the oil market has lead to a staggering inflation to where citizens can no longer afford basic commodities. This is clearly a problem as you know your country is in largely an importing country, your government can no longer afford to pay for importations of foods and items such as flour, sugar and other commodities. Venezuelan citizens can be seen standing outside of supermarkets for hours hoping to buy good that are either sold out, were never in stock or are priced way out of their range like a bag of sugar for $12,000 dollars. Many citizens have resorted to getting good spots in lines and selling them just to make money. Your currency problem is only made worse by the inefficient and confusing exchange market. Currently your currency is loosing value faster than any other country in the world. Last year one U.S. Dollar was equaled to 88 bolivars now it is equal to 190 bolivars. Venezuela now has 3 official currencies there is the government official bolivar, then the limited exchange currency the SICAD1 and introduced just this year is the SICAD2 which is used for the private market. Lastly there is the

- For the foreign producers, when their currency weakens, production becomes cheaper (especially if they have currency reserves in dollars), and their sales go up, since the weaker currency is more attractive to foreign buyers.

(Wright and Quadrini, 2009, p. 221) In order to influence the Foreign exchange rate a country will perform an unsterilized foreign exchange intervention, subsequently, these transactions will influence the FX rate exchange because they influence the monetary base. The reasons for interventions vary, but one is to stabilize the FX exchange rate. An example of a unsterilized transaction would be if a Central Bank bought $50 million Foreign international reserves. It would increase foreign international reserves and the monetary base. In contrast, there is a sterilized transaction in which the Central Bank which should not have a long term impact on the Foreign exchange rate. To offset the purchase of the $50 million Foreign reserves it might sell $50 million domestic bonds. (Wright & Quadrini, 2009, p.

Thus the rationale behind changing the nominal exchange rate under a fixed or pegged exchange rate system is easy to follow provided that the set rate is found to be far away from the optimal or equilibrium rate. However, why does the central bank need to manage exchange rates which are determined by market forces in case of independent floating? This remains a contentious issue. Essentially, the central bank is believed to determine the appropriate level (or path) of the nominal exchange rate and then intervene in foreign exchange markets to bring the actual exchange rate close to the appropriate level. In practical sense, the appropriate level of the exchange rate may represent the rate which, when translated into a real exchange rate, is consistent with the long-run equilibrium real exchange rate. Many economists of neoclassical persuasion believe that the market determined exchange rates broadly represent the long-run equilibrium exchange rates and there is no need for managing exchange rates or intervention in foreign exchange markets.

One of the solutions for the dollar rising is to sell part of our reserves in dollars and, in this sense, to regulate the dollar with the peso.

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

The money they spent on imports is more than the money they are taking in from exports, creating an excess supply of pesos. In order to eliminate this, the only way is to buy them back.

To maintain a balanced and successful economy, the North American member governments have used contractionary monetary policies. All the major banks throughout the NAFTA nations decrease the money supply by increasing the overnight lending rate. This causes interest rates to rise either directly or through the increase in the supply of bonds on the open market through sales by the Fed or by banks. This increase leads to a reduction in the price for bonds, which will be bought by foreign investors, thus, increasing the value and demand of the domestic currency and decreasing the value and demand of the foreign currency. This in turn makes domestic products more expensive abroad and foreign products cheaper domestically, causing more foreign products to be sold domestically and less domestic products sold abroad. As a result, there is a higher exchange rate. The higher exchange rate causes exports to decrease, imports to increase as well as the balance of trade to decrease, moving the aggregate demand curve down. However, when imports exceed exports, there is a trade deficit, meaning that there is an outflow of domestic currency to foreign

However, it does not take an expert to draw the conclusion that Venezuela revenue is extremely volatile and economy situation directly dependent on the price of the oil barrels. The revenue generated by oil exports is the main source of foreign exchange, which is used in turn to import many food and consumer goods, as well as intermediate inputs for production. Venezuela is also heavily dependent on imports of goods such as raw materials, machinery, electronics, and food. In 2003, Chavez government started intervening in the currency control, introducing foreign exchange controls that varied between multiple or single exchange rates. When currency control was introduced, a dollar bought 1.6 bolivars; while today, the same dollar can buy 172 bolivars at one of the government 's exchange rates.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.