[MUSIC] What does the real world of currencies look like? We're going to look at a couple of aspects of this. One is just to define the different ways that countries manage or don't mange their currency. So we have in the world, and you can look at this classification every year, at the IMF website where they'll actually classify these changing exchange rate regimes. But we have a lot of different options that countries may follow. For example, they may want some sort of a fixed exchange rate. Okay, for example the most rigid of all is a currency board. This is where you have in your reserves one reserved currency, say US dollar, for every one domestic currency unit that's circulating. So this is very, very rigid. It doesn't allow you a lot of freedom if your a monetary authority to create currency in the country. Two examples would be Hong Kong, which keeps US dollars in reserves and prints them one for one, or Bulgaria, which has a currency board with the Euro. Then there are a whole variety of different options after this which are a little less rigid. But there are pegs, there are crawling pegs, there are bands, and then there's a target exchange rate within those bands. And we have many examples of those if we think of pegs maybe Denmark. If we think of crawling pegs or crawling bands, you might have Botswana or Costa Rica, Honduras a target exchange range within bands. The European Monetary system has operated this way, where you have a target exchange rate in the middle, but you allow it to move in and out a certain percentage point difference from this central rate. And remember, if you're in one of these systems, thinking the impossible trinity, if you're in one of these systems where you are managing your exchange rate, you do lose control of your monetary policies. So all of these countries have their monetary policy compromised as far as being able to use it to effect the domestic economy. Then there are the countries that have floating exchange rates. And here we also have just a little bit of variety. There are some that have what we call a managed float, in other words they let the currency go where the market wants to take it, where supply and demand want to take it. And what they may do is just buy or sell the currency so that it doesn't move so fast. So examples of that could be Kenya Or India where the currencies do float, but the government manages them somewhat so we don't have drastic changes. And then absolute free floats are in general all of the developed countries, the richest developed countries in the world. So Australia, the United States, Canada, the Euro zone, the UK, where the currencies move all together. So again, thinking of that impossible trinity, they give up exchange rate management. They do not attempt to manage the value of the currency. So they can keep their monetary autonomy and free capital flows. Some countries actually give up their currency and use a foreign currency instead. So we have examples of that, we call it dollarization indicates where they give up their currency and use the US dollar. You have Ecuador, you have Panama as examples of that. Zimbabwe is the most recent one to join this club. And then there are some that use the Euro as well, so Montenegro would be an example of that. So these are the different exchange rate regimes we find in the world. Now, another thing that we might want to observe, and I've got a chart to show you this, is which are the world's most traded currencies. And now this survey comes out every three years. And this chart will show one side of an exchange rate transaction limit. So you see the dollar up here at the top, and it looks like it's close to 90%. And you'll say well, how can there be a 90 and then a 40, and then a 30? That's more than 100%. Well this is the dollar as half of a transaction, okay? So if the dollar Euro is traded, you get the number in the Euro and in the dollar. So these numbers will add up to 200, not 100, okay? But you can see the dollar is half of most transactions in the world. The dollar is hands-down the most used currency in international transactions on that virtual currency market we've been talking about. It's followed as you go down by the Euro at some distance, and then behind them we've got the pound sterling, the Japanese Yen. And when you move down you'll see other currencies that are much less used. You can see the Chinese Yuan which is being used more recently, but it's still a very, very tiny currency in total international currency market turnover. [MUSIC]
