ECN500 Saudi Electronic University Fixed Exchange Rate in Saudi Arabia Paper How do fiscal and monetary policies under the fixed exchange rate in Saudi Ara

ECN500 Saudi Electronic University Fixed Exchange Rate in Saudi Arabia Paper How do fiscal and monetary policies under the fixed exchange rate in Saudi Arabia help the country to increase the living standard? What are the goals of the monetary and fiscal policies, and how are they achieved? What are the challenges that the country may encounter on the journey to achieve the goals? What are the instruments they may use to overcome these challenges?Your essay is required to be eight to ten pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources.Follow APA style guidelines.It is strongly encouraged that you submit all assignments into Turnitin prior to submitting them to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin – Student Guide for step-by-step instructions.Review the grading rubric to see how you will be graded for this assignment. ECN500
Critical Thinking Writing Rubric – Module 13
Exceeds
Expectation
Content, Research, and Analysis
25-30 Points
Requirements
Exceeds
Expectation Includes all of the
required
components, as
specified in the
assignment.
29-35 Points
Content
Exceeds
Expectation Demonstrates
substantial and
extensive
knowledge of the
materials, with no
errors or major
omissions.
37-45 Points
Analysis
Exceeds
Expectation Provides strong
thought, insight,
and analysis of
concepts and
applications.
13-15 Points
Sources
Exceeds
Expectation Sources go above
and beyond
required criteria,
and are well
chosen to provide
effective
substance and
perspectives on
the issue under
examination.
Meets Expectation
Below Expectation
Limited Evidence
19-24 Points
Meets Expectation
– Includes most of
the required
components, as
specified in the
assignment.
13-18 Points
Below Expectation
– Includes some of
the required
components, as
specified in the
assignment.
7-12 Points
Limited Evidence Includes few of the
required
components, as
specified in the
assignment.
22-28 Points
Meets Expectation
– Demonstrates
adequate
knowledge of the
materials; may
include some
minor errors or
omissions.
15-21 Points
Below Expectation
– Demonstrates fair
knowledge of the
materials and/or
includes some
major errors or
omissions.
8-14 Points
Limited Evidence Fails to
demonstrate
knowledge of the
materials and/or
includes many
major errors or
omissions.
28-36 Points
Meets Expectation
– Provides
adequate thought,
insight, and
analysis of
concepts and
applications.
10-12 Points
Meets Expectation
– Sources meet
required criteria
and are adequately
chosen to provide
substance and
perspectives on the
issue under
examination.
19-27 Points
Below Expectation
– Provides poor
thought, insight,
and analysis of
concepts and
applications.
10-18 Points
Limited Evidence Provides little or no
thought, insight,
and analysis of
concepts and
applications.
7-9 Points
Below Expectation
– Sources meet
required criteria,
but are poorly
chosen to provide
substance and
perspectives on the
issue under
examination.
4-6 Points
Limited Evidence Source selection
and integration of
knowledge from
the course is
clearly deficient.
ECN500
Critical Thinking Writing Rubric – Module 13
Mechanics and Writing
Demonstrates
college-level
proficiency in
organization,
grammar and
style.
5 Points
Exceeds
Expectation Project is clearly
organized, well
written, and in
proper format as
outlined in the
assignment. Strong
sentence and
paragraph
structure; contains
no errors in
grammar, spelling,
APA style, or APA
citations and
references.
Total points possible = 130
4 Points
Meets Expectation
– Project is fairly
well organized and
written, and is in
proper format as
outlined in the
assignment.
Reasonably good
sentence and
paragraph
structure; may
include a few
minor errors in
grammar, spelling,
APA style, or APA
citations and
references.
3 Points
Below Expectation
– Project is poorly
organized and
written, and may
not follow proper
format as outlined
in the assignment.
Inconsistent to
inadequate
sentence and
paragraph
development,
and/or includes
numerous or major
errors in grammar,
spelling, APA style,
or APA citations
and references.
1-2 Points
Limited Evidence Project is not
organized or well
written, and is not
in proper format as
outlined in the
assignment. Poor
quality work;
unacceptable in
terms of grammar,
spelling, APA style,
and APA citations
and references.
INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 14:
ExchangeRate Systems
and Currency
Crises
© 2019 Cengage. All rights reserved.
2
Chapter Outline
(1 of 2)
Exchange-Rate Practices
Choosing an Exchange-Rate System:
Constraints Imposed by Free-Capital Flows
Fixed Exchange-Rate System
Floating Exchange Rates
Managed Floating Rates
© 2019 Cengage. All rights reserved.
3
Chapter Outline
(2 of 2)
The Crawling Peg
Currency Manipulation and Currency Wars
Capital Controls
Increasing the Credibility of Fixed Exchange
Rates
© 2019 Cengage. All rights reserved.
4
Exchange-Rate Practices (1 of 5)
In choosing an exchange-rate system, a
nation must decide whether to allow its
currency to be determined by market forces
(floating rate) or be fixed (pegged) against
some standard of value
© 2019 Cengage. All rights reserved.
5
Exchange-Rate Practices (2 of 5)
• Floating exchange-rate system
• Nation must decide whether currency should
float independently, float in unison with other
currencies, or crawl according to
predetermined formula
• Pegged exchange-rate system
• Fixed against some standard of value; nation
must decide whether to
• Anchor to single currency, basket of currencies, or
gold
© 2019 Cengage. All rights reserved.
6
Exchange-Rate Practices (3 of 5)
• Members of the IMF
• Exchange rates should not be manipulated
• To prevent effective balance-of-payments
adjustments
• To gain unfair competitive advantage over other
members
• Members should act to counter short-term
disorderly conditions in exchange markets
• When members intervene in exchange markets,
must take into account interests of other
members
© 2019 Cengage. All rights reserved.
7
Exchange-Rate Practices (4 of 5)
TABLE 14.1 Exchange-Rate Arrangements of IMF Members,* 2015
Exchange Arrangement
Percentage of IMF Members
Hard pegs
No separate legal tender
Currency board
6.8
5.8
Soft pegs
Conventional pegged (fixed) exchange rates
Stabilized arrangement
Crawling peg
Crawling-like arrangement
Pegged exchange rate within horizontal bands
23.0
11.5
1.6
10.5
0.5
Floating
Managed floating
Free floating
Other
19.4
15.7
5.2
100.0
*Includes 188 member countries.
Source: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, 2015. See
also International Monetary Fund, Classification of Exchange Rate Arrangements and Monetary Policy Frameworks,
available at http://www.imf.org/.
© 2019 Cengage. All rights reserved.
8
Exchange-Rate Practices (5 of 5)
TABLE 14.2 Choosing an Exchange-Rate System
Characteristics of Economy
Implication for the Desired Degree of Exchange-Rate Flexibility
Size and openness of the
economy
If trade is a large share of national output, then the costs of currency
fluctuations can be high. This suggests that small, open economies may best be
served by fixed exchange rates.
Inflation rate
If a country has much higher inflation than its trading partners, its exchange
rate needs to be flexible to prevent its goods from becoming uncompetitive in
world markets. If inflation differentials are more modest, a fixed rate is less
troublesome.
Labor-market flexibility
The more rigid wages are, the greater the need for a flexible exchange rate to
help the economy respond to an external shock.
Degree of financial
development
In developing countries with immature financial markets, a freely floating
exchange rate may not be sensible because a small number of foreign exchange
trades can cause big swings in currencies.
Credibility of policy makers
The weaker the reputation of the central bank, the stronger the case for
pegging the exchange rate to build confidence that inflation will be controlled.
Capital mobility
The more open an economy to international capital, the harder it is to sustain a
fixed rate.
© 2019 Cengage. All rights reserved.
9
Choosing an Exchange-Rate System:
Constraints Imposed by Free Capital Flows
(1 of 2)
Allowing free capital flows
• Constrains a country’s
• Choice of exchange-rate system
• Ability to operate independent monetary policy
Impossible trinity
• A country can maintain only two of the
following three policies:
• Free capital flows
• Fixed exchange rate
• Independent monetary policy
© 2019 Cengage. All rights reserved.
10
Choosing an Exchange-Rate System:
Constraints Imposed by Free Capital Flows
(2 of 2)
© 2019 Cengage. All rights reserved.
11
Fixed Exchange-Rate System
(1 of 9)
Use of fixed exchange rates
• Used primarily by small, developing nations
with currencies anchored to key currency
Key currencies
• Widely traded on world money markets
• Have demonstrated relatively stable values
over time
• Widely accepted as means of international
settlement
© 2019 Cengage. All rights reserved.
12
Fixed Exchange-Rate System
(2 of 9)
TABLE 14.3 Key Currencies: Currency Composition of Official Foreign Exchange
Reserves of the Member Countries of the International Monetary Fund, 2016
Key Currency
Composition of Official Foreign Exchange Reserves
U.S. dollar
63.9%
Euro
19.7
British pound
4.4
Japanese yen
4.2
Canadian dollar
2.0
Australian dollar
1.8
Chinese yuan
1.1
Other
2.9
100.0
Source: From Currency Composition of Official Foreign Exchange Reserves (COFER), International Monetary Fund, 2017,
available at www.imf.org.
© 2019 Cengage. All rights reserved.
13
Fixed Exchange-Rate System
(3 of 9)
• Anchoring to single currency
• Generally done by developing nations whose
trade and financial relations are mainly with a
single industrial-country partner
• Some nations anchor to special drawing
right (SDR)
• Basket of four currencies established by IMF
© 2019 Cengage. All rights reserved.
14
Fixed Exchange-Rate System
(4 of 9)
• Par value and official exchange rate
• In terms of gold or other key currencies
• Official exchange rate
• Can be determined by comparing par values of two
currencies
© 2019 Cengage. All rights reserved.
15
Fixed Exchange-Rate System
(5 of 9)
• Exchange-rate stabilization
• Exchange stabilization fund
• Used to defend official rate through purchases and
sales of foreign currencies
• Fundamental disequilibrium
• Long-term, official exchange rate and the market
exchange rate may diverge, reflecting changes in
fundamental economic conditions like income
levels, tastes, preferences, and technological
factors
© 2019 Cengage. All rights reserved.
16
Fixed Exchange-Rate System
(6 of 9)
• Devaluation and revaluation
• Devaluation-counteracting payments deficit
• Revaluation-counteracting payments surplus
• Depreciation and appreciation
• Actual impact on market exchange rate
caused by
• A redefinition of par value
• Changes in exchange rate
• Changes in the supply or demand of foreign exchange
© 2019 Cengage. All rights reserved.
17
Fixed Exchange-Rate System
(7 of 9)
• Bretton Woods System of Fixed
Exchange Rates
•
•
•
•
Semi-fixed exchange-rate system
Adjustable pegged exchange rates
Currencies tied to each other
Nation could repeg its exchange rate via
devaluation or revaluation policies
• Use fiscal and monetary policies first to
correct payment imbalances
© 2019 Cengage. All rights reserved.
18
Fixed Exchange-Rate System
(8 of 9)
• Bretton Woods System (cont.)
• Agree to defend existing par values
• Correct fundamental disequilibrium by
repegging currencies
• Up to 10% without permission from IMF
• By greater than 10% with the fund’s permission
• Par value set in terms of gold or gold content
of U.S. dollar in 1944
• Market exchange rates were almost but not
completely fixed
© 2019 Cengage. All rights reserved.
19
Fixed Exchange-Rate System
(9 of 9)
• Bretton Woods System (cont.)
• Operational problems (cont.)
• Currency devaluation indicated failure of domestic
policies
• Currency revaluations unacceptable to exporters
• Repegging exchange rates only as a last resort
• Difficult because of adjustable pegged rates
• Speculators had incentive to move out of
weakening currency
© 2019 Cengage. All rights reserved.
20
Floating Exchange Rates (1 of 4)
• Floating exchange rates (flexible)
• Currency prices established daily in foreignexchange market
• Without restrictions imposed by government policy
• Equilibrium exchange rate
• Demand for and supply of home currency
• Changes in exchange rate
• Correct a payments imbalance
• Shifts in imports and exports of goods, services, and
short-term capital movements
© 2019 Cengage. All rights reserved.
21
Floating Exchange Rates (2 of 4)
• Trade restrictions, jobs, and floating exchange
rates
• During economic downturns, labor unions lobby for
import restrictions to save jobs of domestic workers
• Implementation of import restrictions
•
•
•
•
Helps one industry
Shifts jobs from other industries to protected industry
Has no significant impact on aggregate employment
Leads to short-term employment gains in protected
industry being offset by long-term employment losses in
other industries
© 2019 Cengage. All rights reserved.
22
Floating Exchange Rates (3 of 4)
• Arguments for floating rates
• Respond quickly to changing supply and demand conditions
• Clear the market of shortages or surpluses of a given
currency
• Simplified institutional arrangements that are relatively easy
to enact
• Continuous adjustment in the balance of payments
• Partially insulate home economy from external forces
• Nations have greater freedom to pursue policies that
promote domestic balance
© 2019 Cengage. All rights reserved.
23
Floating Exchange Rates (4 of 4)
• Arguments against floating rates
• Unregulated market may lead to wide fluctuations in
currency values and discourage foreign trade and
investment
• Inflationary bias; monetary authorities may lack financial
discipline
• Greater freedom for domestic financial management
© 2019 Cengage. All rights reserved.
24
Managed Floating Rates
(1 of 6)
Managed floating system
• Informal guidelines established by IMF for
coordination of exchange-rate policies
• Nations might intervene in exchange markets to
avoid exchange-rate alterations that would weaken
their competitive position
• Concern that floats over time might lead to
disorderly markets with erratic fluctuations in
exchange rates
• Nation can alter degree to which it intervenes
in foreign-exchange market
© 2019 Cengage. All rights reserved.
25
Managed Floating Rates
(2 of 6)
• When U.S. suspended gold convertibility & allowed
overvalued dollar to float, hoped free market
adjustment would result in depreciation of dollar
against undervalued currencies
• Clean float
• Market solution; but foreign central banks refused
to permit and intervened in exchange market
• Dirty float
• Interference in market; forces of supply & demand
not allowed to play equilibrating role
© 2019 Cengage. All rights reserved.
26
Managed Floating Rates
(3 of 6)
• Leaning against the wind
• Intervene to reduce short-term fluctuations in
exchange rates without attempting to adhere
to any particular rate over long term
• Target exchange rates
• To reflect long-term economic forces that
underlie exchange-rate movements
© 2019 Cengage. All rights reserved.
27
Managed Floating Rates
(4 of 6)
• Managed floating rates in the short run and long run
• Market intervention stabilizes exchange rates in short term; allows
market forces to determine exchange rates in long term
© 2019 Cengage. All rights reserved.
28
Managed Floating Rates
(5 of 6)
• Exchange-rate stabilization & monetary policy
• To stabilize a currency’s exchange value; expansionary/contractionary
monetary policy
© 2019 Cengage. All rights reserved.
29
Managed Floating Rates
(6 of 6)
• Is exchange-rate stabilization effective?
• May be useful when exchange rate is under
speculative attack
• May be helpful in coordinating private-sector
expectations
• Research provides some support for shortterm effectiveness
• Does not support long-term intervention
© 2019 Cengage. All rights reserved.
30
The Crawling Peg
Crawling peg system
• Small, frequent changes in par value of currency
to correct balance-of-payments disequilibrium
• Process of exchange-rate adjustment is
continuous for all practical purposes
• Used by nations with high inflation rates
• Combines flexibility of floating rates with stability
usually associated with fixed rates
© 2019 Cengage. All rights reserved.
31
Currency Manipulation and
Currency Wars (1 of 3)
Currency manipulation
• Purchase or sale of currency by fiscal or
monetary authority to influence its value
• In 2000s, U.S. accused Japan, China, South
Korea, Singapore, and other countries of
keeping the exchange values of their
currencies artificially low in order to boost
international competitiveness and trade
surpluses.
• U.S. has been doing the same thing
© 2019 Cengage. All rights reserved.
32
Currency Manipulation and
Currency Wars (2 of 3)
• Is China a currency manipulator?
• U.S.: China manipulates the yuan
• Yuan significantly undervalued relative to dollar
• U.S. exports to China more expensive
• Harms U.S. production and employment
• Chinese goods cheaper for American consumers
• More imports
• Huge trade surplus with United States
• Large accumulation of dollar reserves
© 2019 Cengage. All rights reserved.
33
Currency Manipulation and
Currency Wars (3 of 3)
• Is China a currency manipulator?
• Others say there’s little or no connection
between yuan and health of U.S.
manufacturing
• Other analysts contend that China’s currency
intervention yields positive results for the U.S.
economy
© 2019 Cengage. All rights reserved.
34
Currency Crises
(1 of 4)
Major currency crises have been common in
recent years
Currency crisis (speculative attack)
• Weak currency experiences heavy selling
pressure
• Some reasons: sizable losses in foreign reserves
held by country’s central bank
• Depreciating exchange rates in forward market
• Currency crisis can decrease growth of GDP
by 6% or more
© 2019 Cengage. All rights reserved.
35
Currency Crises
(2 of 4)
• Crisis ends when selling pressure stops; ways to
end pressure include:
• Devaluation: establish new exchange rate at
sufficiently depreciated level
• Adoption of floating exchange rate
• Imposition of restrictions on ability of people to buy
and sell foreign currency
• Use of loan to bolster foreign reserves of monetary
authority
• Restoration of confidence in existing rate
• Crisis ending in devaluation: currency crash
© 2019 Cengage. All rights reserved.
36
Currency Crises
(3 of 4)
• Sources of currency crises
•
•
•
•
•
•
•
•
Currency speculators
Budget deficits financed by inflation
Weak financial systems
Recently deregulated financial systems
A weak economy
Political factors
External factors
Choice of an exchange-rate system
© 2019 Cengage. All rights reserved.
37
Currency Crises
(4 of 4)
• Speculators attack East Asian currencies
• July 1997: Thai abandoned baht’s peg to USD
• October 1997: Baht depreciated by 60%
against USD
• Triggered wave of speculation against other
Southeast Asian currencies
• Some economists argue abandoning fixed
exchange rates not in long-term interest
© 2019 Cengage. All rights reserved.
38
Capital Controls (1 of 5)
Capital controls (exchange controls)
• Government-imposed barriers
•
•
•
•
•
To foreign savers investing in domestic assets
To domestic savers investing in foreign assets
Government directly bypasses market forces
Direct controls on international transactions
Government allocates foreign exchange among
traders and investors
• Government sets prices
© 2019 Cengage. All rights reserved.
39
Capital Controls (2 of 5)
• Advantages
• Enables government to influence its payments
position by regulating amount of foreign
exchange allocated to imports or capital outflows
• Enables government to encourage or discourage
certain transactions by offering different rates for
foreign currency for different purposes
• Gives domestic monetary and fiscal policies
greater freedom in their stabilization roles
© 2019 Cengage. All rights reserved.
40
Capital Controls (3 of 5)
• Disadvantages
• Capital outflows ma…
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