Questions tagged [exchange-rates]

the price at which one currency may be exchanged for another.

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15
votes
3answers
18k views

Real Exchange Rate vs PPP rate

I'm having troubles to understand the difference between the Real Exchange Rate and the PPP rate. I know the first one is calculated using a basket of goods and services so that the non-tradeable ...
14
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3answers
2k views

Should Finland leave the eurozone?

Finland's economic recovery from the shock of the global financial crisis of 2007–2008 has been very weak. The country has been in recession for the past three years, with GDP expected to expand by ...
11
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5answers
19k views

How does a country devalue its currency?

I recently read an article in the New York Times that talked about China devaluing its currency (which I believe is held to a peg against the US Dollar). My question is: specifically what tools does a ...
10
votes
3answers
2k views

How is it possible that all currency exchange rates are fixed w.r.t. to each other?

I wondered if it would be beneficial to exchange a currency through one or more "in-between" currencies. For example: instead of trading Russian Ruble (RUB) to Euro's (EUR), one would trade from RUB ...
9
votes
3answers
1k views

Why did the Swiss National Bank abandon its currency peg so suddenly?

There are many theories about why the Swiss National Bank (SNB) abandoned its currency peg a few days ago. My question is more specific: why did they make the change so sudden? Why not reduce the ...
9
votes
1answer
191 views

How does a bank convert one currency to another?

Say for example I sell ZAR and buy USD. What happens behind the scenes so that the local ZAR bank is able to deposit USD into my account? Does the bank require some sort of USD cash reserve? How do ...
8
votes
2answers
2k views

What would happen if the world switched to a single currency?

What would happen if all countries suddenly stopped using local currencies and adopted a global currency (like the Euro, but for everyone)?
8
votes
3answers
2k views

What are the differences between the older gold standard and the current fiat money standard?

My current limited understanding is that the gold standard was a system in which there was a fixed currency amount per unit of gold. For example, 1 ounce of gold might be 100 USD. Another country like ...
8
votes
2answers
871 views

Currency Devaluation and the causes of the Tequila Crisis

I was reading about some of the famous crisis that happened in the past and i came across "the tequila crisis" in mexico during 1994-96. As a background, The Tequila crisis (also known as the Mexican ...
8
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3answers
339 views

What determines the exchange rate of two fiat currencies if the supply of each is known?

In this blog post, economist Steve Landsburg posed a question about the value of Bitcoin which he didn't know the answer to. Imagine a future in which Bitcoins (or some other non-governmental ...
7
votes
1answer
476 views

How can the Swiss exchange rate be very biased in a free market?

In 2002, when Germany, France, Italy and Austria adopted the Euro currency, the exchange rate with Switzerland was 1.60 CHF (Swiss Franc) = 1€ (Euro). The prices and salaries in Switzerland were ...
6
votes
1answer
491 views

How does US (its economy, banks, industry) profit from dollar being the “standard currency”?

How does US (its economy, banks, industry, "finance industry") profit from dollar being the "standard currency"? I am not seeking "ideological" explanations, but explanations of the mechanisms ...
6
votes
1answer
847 views

Interest rate parity: Counter intuitive

What is the basis for interest rate parity to hold? I know, the reason stated is excess returns Excess returns as such should not be the reason for a currency depreciation. for e.g. when we posit ...
6
votes
1answer
776 views

Australian Dollar Devaluation

I am a layman in economics. I am curious about the current devaluation of Australian Dollar in comparison with the US Dollar. Could someone please explain, in simplest words possible: What causes ...
6
votes
2answers
303 views

If Greece defaults, can it still stay with the euro?

Should Greece default, a forced conversion from euros to drachmas will be a further catastrophe to Greek economy as the drachma will quickly collapse. However, if Greece leaves the Eurozone, but keeps ...
5
votes
2answers
444 views

Why was Swiss National Bank in red by keeping fix exchange rate to Euro?

When I read news about the action of Swiss National bank of not keeping fix ration to Euro any more, I read in all articles, that it was too expensive for Swiss National Bank to keep the fixed ...
5
votes
1answer
13k views

Do import tariffs tend to increase a country's exchange rate (if so, why)?

From Prof. Stiglitz' Vanity Fair article: How, one might ask, is this possible, given Trump’s rhetoric, his determination to move against China with a 45 percent tariff? There’s a global ...
5
votes
1answer
125 views

Do we have some evidence of overshooting?

I was going through overshooting of exchange rates (which I probably haven't seen since undergrad) and it seemed to me that the story is a bit of a stretch. I wonder if there is some empirical test ...
4
votes
1answer
338 views

Bretton Woods vs Gold Standard

I've been reading about the history of the IMF recently, and it strikes me as odd that despite the problems that arose with the gold standard (Germany in the 1920s, Fed cutting money supply during the ...
4
votes
1answer
2k views

Nominal GDP versus PPP in comparing military spending of different countries?

Military spending as percentage of GDP is the most used measure of the economic capability of a certain country/military. But Some countries like India for example, have a huge difference between ...
4
votes
1answer
235 views

What would happen in Venezuela if the currency exchange control is removed overnight?

What would happen in Venezuela if the government all of a sudden starts offering currency exchange by the prices of the free market? To my knowledge, the main reason for the government in Venezuela ...
4
votes
1answer
117 views

What economics aggregate(s) could suggest an imminent change in exchange rates?

I have read articles about the Swiss Franc breaking its peg with the dollar and I would like to understand what indicators people look at to determine whether a currency break/depegging is imminent. ...
4
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0answers
43 views

Mechanics of Sterilized Intervention?

I'm looking to see if someone can help improve my understanding of sterilized intervention in FX markets. My intuition/understanding is: Assume that the domestic currency is depreciating, perhaps ...
3
votes
3answers
484 views

Question on real exchange rate

If the Phillipine peso falls in value against the USD by 5% in a year, but the domestic inflation rate in the Phillipines is 10%, compared to 2% in the USA, the nominal exchange rate has fallen (by 5%)...
3
votes
1answer
331 views

How can the HKMA peg the Hong Kong dollar at 7.8 HKD/USD for so long?

A lot of pegged exchange rate systems don't stay pegged for so long (e.g. because the central bank run out of reserves to maintain their values) So far I understand that the HKD is 100% backed by the ...
3
votes
1answer
145 views

Why is the Argentine Peso still so expensive?

In the last twelve months, the argentine peso (ARS) lost about 11% of its value in comparison to USD. In the same time range the prices rouse about 29% (spanish). What's the reason for this effect? ...
3
votes
1answer
45 views

How rate rise by the Fed, higher than market expectation will lead to strengthening of Dollar?

If the Fed follows through on its forecasts, though, and raises rates faster than markets expect in 2016, the dollar may well rise further, dampening inflation quickly From : http://www.economist.com/...
3
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1answer
305 views

Changing the base year of Real GDP from 2001 Euros to 1990 Geary–Khamis dollars

Estimating regional Gdp in Italy (1871-2001): sources, methodology, and results (Felice, E) This article has Italian historical regional GDP figures, but they are in constant 2001 euros not in 1990 ...
3
votes
1answer
136 views

What is the proof for why border adjustments are exactly offset in theory by currency appreciation?

Why is it true, in theory, that border adjustments are exactly offset by currency appreciation? I've read the colloquial explanations online, but am looking for something more rigorous. For example, ...
3
votes
2answers
124 views

Doubt in understanding the advantages of Fixed Exchange Rate

The author of my book writes: ADVANTAGES OF EXCHANGE RATE If exchange rates are fixed, then inflation may have a very harmful effect on the demand for exports and imports. Because of this, ...
3
votes
1answer
11k views

Why did US dollar appreciate during the Global Economic Crisis (2007-09)

We know that the US dollar exchange rate increased during the global recession while usually when an economy performs weakly its currency should depreciate. How was there still a huge demand for USD ...
3
votes
3answers
1k views

Why is Indian rupee is stable against the USD even though most other currencies weakening?

The Indian Rupee (INR) seems fairly stable against the USD (1 USD = 62-64 INR) in the recent times even though most other currencies have weakened against USD, some by 20-30%. Apparently, INR is ...
3
votes
1answer
520 views

Why New Zealand dollar keeps falling against USD and other currencies?

New Zealand seems to have strong economy and governed well by the RBNZ. Agreed that recent decrease in the dairy prices globally has some negative effects on the economy. But with the large service ...
3
votes
1answer
86 views

How does imposing 100 percent cash margin requirement on imports help to stabilize foreign exchange reserves of a country?

My country is facing a critical depreciation of its currency's exchange rate and the central bank has introduced a 100 percent cash margin requirement on a selected set of imports. My main problem is ...
3
votes
1answer
172 views

Why imports increase if higher relative inflation?

I'm reviewing a previous AP Macroeconomics exam and I saw the following question: The United States and South Korea are trading partners, and the United States has a zero current account balance. ...
3
votes
2answers
513 views

Interest Rate Differential and Fisher's Interest Rate Parity

The Fisher formula for interest rate parity, as explained here shows that for a given currency pair, the currency with the higher interest rate will depreciate relative to the the currency with the ...
3
votes
2answers
4k views

How inflation affects exchange rates?

I have a question regarding the impact of inflation on exchange rate between trading countries. Let's assume a hypothetical situation where the UK and the USA trade with each other. The USA import ...
3
votes
1answer
4k views

Dornbusch model for exchange rate undershooting

Is it possible to reproduce nominal exchange rate undershooting within the framework of Dornbusch model? If the governments does fiscal expansion, does undershooting happen?
3
votes
0answers
84 views

Currency Peg or Currency Substitution/Dollarize?

Why would a sovereign state choose an exchange rate peg over the demonetization of the local currency, replaced by hard currency? In the case of the West and Central African CFA Francs, France has an ...
2
votes
2answers
3k views

Who determines the exchange rate and how?

I have almost no knowledge about economics. However, a question always comes in my mind. How exchange rate really differ? I live in Bangladesh. So how, why, who changing BDT and US Dollar exchange ...
2
votes
3answers
3k views

What is the reason of devaluation in Turkish Lira?

I guess there is a some fundamental issues in the economy but I wonder the apparent reason of the recent devaluation in Turkish Lira? Does Turkey need to pay debt in very short term? How much is it? ...
2
votes
1answer
147 views

Norway inflation and exchange rates

I am looking at Norway's economy, and I'm trying to make sense of some of the data I see. Norway's economy has a very close relationship to crude oil, and in 2014 crude oil had a massive drop. Looking ...
2
votes
1answer
46 views

The effects of Quantative Easing (QE) on FX rates?

What are the effects of quantitative easing on the foreign exchange rates? If the central bank starts buying debt denominated in domestic currency, I would think that the market would be flooded ...
2
votes
4answers
21k views

What is the relationship between inflation and imports/exports?

According to the aggregate demand curve, when the price level is higher, the real GDP demanded is lower. One of the explanations given is a consequence of the Mundell-Fleming model: "As the price ...
2
votes
1answer
6k views

Uncovered Interest Parity (UIP) condition approximation

Until otherwise $e=\frac{\text{Domestic currency}}{\text{Foreign currency}}$. The UIP condition can be written in the following form: Investing now in a domestic bond, must give the same return as ...
2
votes
1answer
38 views

why the currency crisis must occur at time t0 when the pegged rate equals the shadow exchange rate [closed]

Explain why the currency crisis must occur at time t0 when the pegged rate equals the shadow exchange rate and not before or after t0. Suppose the crisis were to occur at a date before and after t0 ...
2
votes
1answer
605 views

What exactly is Foreign Currency Indexation?

As I understand it, foreign currency indexation (FCI) is when a government pegs its currency to another (usually the dollar), and their central bank buys or sells dollars to maintain a stable exchange ...
2
votes
0answers
33 views

Dornbush model - relationship between i and S

In the Dornbush model, when we separate short and long run equilibrium. This is what I apparently have understood: SR1: an increase in Money Supply ($M_s$) leads to a fall in domestic interest rates (...
2
votes
0answers
36 views

Can one calculate how much increasing the US federal debt affects the “value” of the dollar?

As I understand it, if the US government runs a deficit then it (for the most part) "pays" for that deficit by "selling" government bonds. This tends to drive up interest rates somewhat, but also, ...
2
votes
0answers
207 views

Why should UIP hold?

I am aware of the details of Uncovered Interest Parity, namely that the expected depreciation of a currency vs another one should equal the interest rate differential. I am also aware that empirically ...