Exchange Rate Systems
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The paper provides an introduction to exchange rates and then discusses the advantages and limitations of the exchange rate system. The paper provides a focus on the Canadian exchange rate system and looks at exchange rate arrangements for the non-emerging market developing economies. In addition, the paper explains the concept of floating and the choice between a hard peg and floating.
From the Paper:"We characterize the equilibrium exchange rate in a general equilibrium economy without imposing strong restrictions on the output processes, preferences, or commodity market imperfections. The nominal exchange rate is determined by differences in initial wealth's the currencies of richer countries tend to be overvalued by PPP standards and by differences of marginal indirect utilities of total nominal spending. Changes in the exchange rate mirror differences in growth rates of real spending weighted by relative risk-aversion (which can be time-varying and can differ across countries), and in the case of non-homothetic utility functions, differences in inflation rates computed from marginal spending weights. Thus, standard regression or co-integration tests of PPP suffer from missing-variables biases and ignore variations in risk aversions across countries and over time. When nominal spending is given an independent role (next to prices) in the short-term dynamics, both PPP and the CRRA model become acceptable."
Cite this Term Paper:
Exchange Rate Systems (2003, October 07) Retrieved October 05, 2022, from https://www.academon.com/term-paper/exchange-rate-systems-36394/
"Exchange Rate Systems" 07 October 2003. Web. 05 October. 2022. <https://www.academon.com/term-paper/exchange-rate-systems-36394/>