The Current Exchange Rate Agreements

A currency board (also known as a „linked exchange rate system”) effectively replaces the central bank with a law fixing the currency to that of another country. The national currency remains constantly exchangeable for the reserve currency at the fixed exchange rate. As the anchor currency is now the basis of the movements of the national currency, interest rates and inflation in the domestic economy would be strongly influenced by those of the foreign economy to which the national currency is linked. The Currency Board must ensure that sufficient reserves of the anchor currency are maintained. This is a step away from the official introduction of the anchor currency (called a monetary sub-constitution). However, there are some threats to pure exchange rate fluctuations. Exchange rate fluctuations are not as stable as a fixed exchange rate. If a currency swims, it could lead to a rapid increase in value or depreciation. This could hurt the country`s imports and exports. If the value of the currency rises too sharply, the country`s exports could become too expensive, which would hurt the country`s employment rates. If the value of the currency falls too sharply, the country may not be able to afford decisive imports. The concept of purchasing power parity is important for understanding the two balance exchange rate models below.

Purchasing power parity is a way to determine the value of a product after adjusting based on price differences and the exchange rate. In fact, it does not make sense to say that a book costs $20 in the United States and $15 in England: the comparison is not equivalent. If we know that the exchange rate is 2 dollars/dollar, the book sells in England for 30 dollars, so the book is actually more expensive in England. There are similar examples of countries that adopt the U.S. dollar as your country`s national currency: British Virgin Islands, Caribbean Netherlands, East Timor, Ecuador, El Salvador, Marshall Islands, Micrones Federal States, Palau, Panama, Turks and Caicos Islands and Zimbabwe. Monetary cooperation is the mechanism in which two or more monetary policies or exchange rates are linked and can take place at the regional or international level. [18] Monetary cooperation does not necessarily have to be a voluntary agreement between two countries, as it is also possible for one country to link its currency to another currency without the agreement of the other country. There are different forms of monetary cooperation ranging from fixed parity systems to monetary unions. In addition, many institutions have been established to implement monetary cooperation and stabilize exchange rates, including the European Monetary Cooperation Fund (EMCF) 1973[19] and the International Monetary Fund (IMF)[20][20] [unreliable source] Exchange rates are set on the foreign exchange market, open to a wide range of buyers and sellers, where foreign exchange trade is continuous. The spot price refers to the current exchange rate. The term exchange rate refers to an exchange rate that is now listed and traded, but for delivery and payment at a given future date.

A fluctuating exchange rate is a regime in which the price of a nation`s currency is set by the foreign exchange market on the basis of supply and demand relative to other currencies.