In this article I will explain you the balance Balance of payments model and Asset market model.
Balance of Payments Model
This model holds that a foreign exchange rate must be at its equilibrium level.It is the rate by which a stable current account balance is produced. A nation that is facing a trade deficit will experience reduction in its foreign exchange reserves and due to this the value of its currency will ultimately lowers (depreciates). The nation’s goods (exports) become more affordable in the global market place due to the cheaper currency while it makes imports more expensive. After that an intermediate period is reached then the imports are forced down and exports rise, thus it stabilizes the trade balance and push the currency towards equilibrium.
[click to continue…]
Tagged as:
Asset market Model,
balance of payments,
Balance of payments Model,
bonds,
border-trading of financial assets,
capital account item,
capital flows,
currencies,
currency movements,
currency trading,
current account balance,
derivatives of exchange rates,
drivers of currency movements,
economic growth,
efficient financial market,
equities,
exchange rates,
financial assets,
foreign exchange options markets,
foreign exchange reserves,
global capital flows,
global market place,
increasing role of global capital flows,
inflation,
PPP,
productivity,
spot market,
stock exchange,
stocks,
tradable goods and services,
trade deficit
A fixed exchange rate, is sometimes also referred to as a pegged exchange rate. It is a type of exchange rate regime in which a value of one currency is matched to the value of another single currency or to a group of other currencies, or it may also be matched to another measure of value, such as gold.
In order to stabilize the value of a currency a fixed exchange rate is usually used, vis-a-vis the currency it is pegged to. The trade and investments between the two countries is facilitated by this exchange rate regime, and it is particularly useful for small economies where external trade constitutes a large part of their GDP.
This exchange rate regime is also used as a means by which inflation is controlled. However, as there is arise and fall in the reference value, so does the same rise and fall is shown by the currency pegged to it. In addition to this, in order to achieve macroeconomic stability the use of domestic monetary policy by the government is prevented by a fixed exchange rate.
Maintaining a Fixed Exchange Rate
Typically, if a government is willing to maintain a fixed exchange rate then this can be done either by buying or selling its own currency on the open market. This is one of those reasons due to which governments maintain reserves of foreign currencies.
[click to continue…]
Tagged as:
balance of trade,
black market in foreign currency,
Capital Control,
control of inflation,
Criticisms,
currencies,
currency conversion,
current account transactions,
domestic currency,
domestic market,
dynamics of balance of payment,
exchange rate regime,
FDI,
fixed exchange rate,
Fixed Exchange Rate Regime vs. Capital Control,
foreign currency,
GDP,
inflation,
macroeconomic stability,
Maintaining a Fixed Exchange Rate,
means of maintaining a fixed exchange rate,
pegged exchange rate,
reserves of foreign currencies,
small economies,
stability of the economy system,
trade deficit
