Macroeconomics College Essay Example | Topics and Well Written Essays - 2000 words

Macroeconomics College - Essay Example 1. Exchange arrangements with no separate legal tender - These are countries that belong to a currency union where there is a common legal tender that are used by all the members. An example of this is the Eurodollar of the European Union. 2. Currency board arrangements - a kind of exchange rate regime implemented by the government based on an explicit legislative commitment in exchanging its local currency for a specific foreign currency with corresponding restrictions that ensures the compliance of its legal obligation. 3. Conventional fixed peg arrangements - a country's exchange rate regime that pegs its currency within margins of less that 1 percent as compared with another currency; a cooperative arrangement; or a basket of currencies, "where the basket is formed from the currencies of major trading or financial partners and weights reflect the geographical distribution of trade, services, or capital flows." 4. Pegged exchange rates within horizontal bands - The currency's value "is maintained within certain margins of fluctuation of more than 1 percent around a fixed central rate or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent." 5. ... 6. Exchange rates within crawling bands - The currency is maintained within certain fluctuation margins of at least 1 percent around a central rate-or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent-and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. 7. Managed floating with no predetermined path for the exchange rate - influence of the monetary authority to the exchange rate is done herein without having a specific exchange rate path or target. 8. Independently floating - Under this the market is the one that determines the exchange rate. The central bank intervenes in the foreign exchange market with the aim to moderate the rate of change and to prevent "undue fluctuations in the exchange rate," rather than imposing a level for it (De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework). It is the responsibility of a nation's central bank to choose the appropriate exchange rate regime for its own country. Economic managers, particularly central bank heads, in a country use this as a tool to maintain economic stability. The importance of having the appropriate and fitting exchange rate regime for a specific country is to protect the country from its susceptibility to create economic problems because of its monetary authority's power. Each type of exchange-rate regimes manifests diverse characteristics and produces different results. Reclassifying the existing de facto exchange rate regimes enumerated above will result into the fusion of the eight regimes into three: floating, fixed and pegged exchange rate. For Hanke