Fixed FX Regimes
FNCE 4070 – Financial Markets and Institutions
Floating FX Regimes
• The value of a currency is allowed to fluctuate against all other currencies.
• The USD floats against most major currencies
Fixed FX Regimes
• In a fixed FX regime a currency is pegged relative to the value of another currency (the anchor currency) or basket of currencies
Recent Headlines
• Danish Central Banker: Negative Deposit Rate Successful So Far (1 September 2012 WSJ)
• RBC Offers Negative Interest Rates on Danish Krone, Swiss Franc (9 October 2012 Bloomberg)
Intervention in a Fixed Exchange Rate System
Monetary Policy for a Pegged Currency
• Generally speaking a country that ties its exchange rate to a currency of a larger country loses control of its monetary policy.– If the larger country purses a more contractionary
monetary policy and decreases its money supply then the smaller country will have to do the same.
The Euro – Convergence Criteria
• In order to join the Euro there were strict criteria– A debt to GDP ratio of less than 60%– Government budget deficits had to under control– Inflation within a certain band– Interest rates had to be close to European average– Exchange rate stability
Gross Government Debt in Europe 1997-8
European Government Surpluses 1997-8
Greek Trade Deficit 1988 to present
19761977
19781979
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
0
5,000,000,000
10,000,000,000
15,000,000,000
20,000,000,000
25,000,000,000
30,000,000,000
35,000,000,000
40,000,000,000
45,000,000,000
German and Greek Interest Rates
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 20000
5
10
15
20
25
30
35
GermanyGreece
Greek Drachma vs Deutsche Mark
19691970
19711972
19731974
19751976
19771978
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
0
20
40
60
80
100
120
140
160
180
Greek 10 year Government Bond Yields
Germany 10 year Government Bond Yields
Present Value of $2,000 paid monthly for 30 years
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22%$0.00
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
$700,000.00
$800,000.00
Present Value
Greece Balance of Trade 2001-present
Greece Current Account – includes foreign aid
House Prices In Greece(1997 – prices are 100)
Greek Government External Debt
Target Balances - Europe