Today's Hybrid Exchange Rate System, Currency Blocs, and Fixed Pegs

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From the course by University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1255 ratings

University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1255 ratings

In this course, you will learn all of the major principles of macroeconomics normally taught in a quarter or semester course to college undergraduates or MBA students. Perhaps more importantly, you will also learn how to apply these principles to a wide variety of situations in both your personal and professional lives. In this way, the Power of Macroeconomics will help you prosper in an increasingly competitive and globalized environment. This course is also available in Portuguese. To join the fully translated Portuguese version, visit this page: https://www.coursera.org/learn/macroeconomia-pt/

From the lesson

Exchange Rates, The Balance of Payments, and Trade Deficits

The Dollar Standard and Its Collapse 3:37

Today's Hybrid Exchange Rate System, Currency Blocs, and Fixed Pegs3:14

How Chronic Trade Deficits Can Persist, the Multiplier Link and Global Coordination of Fiscal and Monetary Policies 8:12

The European Monetary System, Germany as a Case Study, and the Benefits of Policy Coordination 4:07

Meet the Instructors

Dr. Peter Navarro
Professor
Paul Merage School of Business

[MUSIC]

Unlike the earlier uniform systems of first the gold standard and

then Bretton Woods, today's exchange rate system fits into no tidy mold.

Without anyone's having planned it,

the world has moved to a hybrid system know as the managed float.

It has these major features.

First a few countries like the United States have a primarily flexible or

floating exchange rate.

In this approach, markets determine the currency's value, and

there is very little intervention.

Second, other major countries such as Canada, Japan, and

more recently Britain have managed but flexible exchange rates.

Under this system a country will buy or

sell its currency to reduce the day to day volatility of currency fluctuations.

A country may also engage in systematic intervention

to move its currency toward what it believes to be a more appropriate level.

Third, many countries, particularly small ones,

peg their currencies to a major currency, or to a basket of currencies.

Sometimes the peg is allowed to glide smoothly upward or

downward in a system known as a gliding or crawling peg.

some countries joined together in a currency block

in order to stabilize exchange rates amongst themselves.

These countries then allow their single currency to float flexibly

relative to those of the rest of the world.

The most important of these blocs is the European Union,

which in 1999 moved to a single currency, the Euro.

Finally, almost all countries tend to intervene either when markets become

disorderly or when exchange rates seem far out of line with existing price levels and

trade flows.

Government exchange rate intervention occurs when the government buys or

sells its own or foreign currencies to affect exchange rates.

For example, the Japanese government on a given day might buy $1

billion worth of Japanese yen with US dollars.

This would cause a rise in value or an appreciation of the yen.

In general, a government intervenes when it believes its foreign exchange rate

is out of line with its currency's fundamental value.

An excellent historical example of such intervention on a broad scale is

offered by the actions of the so called Group of Seven Nations.

In 1987 this group, the US, Germany, Japan, Britain, France,

Italy, and Canada agreed to stabilize the value of the dollar,

relative to the other countries' currencies.

The problem was that during the previous 2 years,

the dollar had declined rapidly because of large US trade deficits.

And the G-7 nations, other than the US, were worried that any further weakening of

the dollar Would stifle their exports, and more broadly, disrupt economic growth.

So these nations agreed to purchase large amounts of dollars

to boost the dollar's value.

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