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Transcript of EXCHANGE RATE REGIMES MONETARY ECONOMICS. Content Short History of the International Monetary System...
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EXCHANGE RATE REGIMES
MONETARY ECONOMICS
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Content
Short History of the International Monetary System
Fixed vs Flexible Exchange RatesOptimal Currency AreaIssues: - Trilemma (Forssbaeck and Oxelheim, 2006) - Gold Dinar as a common currency of OIC countries? - Can Interest Rate policy be used to defend falling exchange rate?
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History of International Monetary System
1880s – WWI: Gold Standard - Every country at fixed e-rate with gold.WWI – 1940s: Interwar Gold-Exchange and Dirty Float - WW I: countries printed money - later, returning to old parity was too hard (too much contraction needed). - UK did return to gold. - Others pegged to a mixture of gold and foreign exchange. - Overall, failed attempts to restore credibility of the gold standard. - 1930s & Great Depression: most countries abandoned their pegs.
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History of International Monetary System
1945-1971: Bretton Woods - dollar pegs to gold & other countries peg to the dollar - US plays central role: monetary policy affects all other countries - 1960s: dollar depreciation countries request gold US lost gold reserves 1971 Nixon closed the gold window.1970s: Floating Exchange rates, oil shocks and stagflation1979: ERM in Europe and eventually EURO in 19991980s --: Developed: free or managed floats Developing: fixed-exchange rates for stability and credibility
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Fixed Exchange Rate Regime
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Fixed Exchange Rate Regime
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Fixed Exchange Rate Regime
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Fixed versus Flexible
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Impossible Trilemma
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Common Currency Area
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THE EURO….
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Maastricht Criteria 1991
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EU Countries
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DISCUSSION OF ISSUES
Trilemma (Forssbaeck and Oxelheim, 2006)Gold Dinar as a common currency in OIC Countries? Lee, G. H. Y. (2011), Gold Dinar for the Islamic Countries? Economic Modeling, 28, 1573-1586.
Can Interest Rate be used to defend falling exchange rate? Dekle, R., Hsiao, C. and S. Wang, (2002), “High Interest Rates and Exchange Rate Stabilization in Korea, Malaysia, and Thailand: An Empirical Investigation of the Traditional and Revisionist Views,” Review of nternational Economics, 10(1), 64-78.