Exchange rates

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Exchange rates by Mind Map: Exchange rates

1. Cross-border economic transactions

1.1. Trade

1.2. investment

1.3. finance

1.4. tourism

1.5. migration


3. Influence by couple of reasons

3.1. Theoretcical

3.1.1. Open-economy macroeconomic principles imply that capital mobility profoundly affects exchange rate policy choices.

3.2. Impirical

3.2.1. The impact of “globalization” on exchange rate politics can be seen both over time and across countries.

4. Exchange rate policy focus on

4.1. optimal currency area criteria

4.1.1. approach goes back to the work of Mundell (1961) and others, and its arguments are well known: currency union between two coun- tries is welfare-improving where factors are mobile between them

4.2. currency as an anchor for inflation expec- tations

4.2.1. emphasizes the use of the exchange rate as a way of overcoming the time-inconsis- tency of monetary authorities’ anti-inflationary commitments.3 A government attempting to signal its seriousness about non-inflationary policy can peg the exchange rate to a nominal anchor currency.

5. Choices and tradeoffs

5.1. By regime

5.1.1. Fixing

5.1.2. Floating has the great advantage of allowing a government to pursue its own independent monetary policy. This independence is valuable because it provides flexibility to accommodate for- eign and domestic shocks, including changes in the terms of trade and world financial conditions.

5.2. By level