Exchange Rate Regimes Rina Oktaviani

Introduction 1944: Bretton Woods  fixed ER sistem, pegged to the US$ 1973  series of crisis  many ER arrangement: Flexible ER Fixed ER Between regimes Which the best?

1. Fixed ER & the adjustment in the Medium Run Perbedaan: Flexible ER: untuk mecapai real depreciation, menurunkan defisit perdagangan atau keluar dari resesi  kebijakan moneter untuk menurunkan sukubunga dan meningkatkan nilai tukar Fixed ER: Negara tidak bisa menyesuaikan tingkat suku bunga. Tingkat sukubunga domestik harus tetap sama dengan tingkat bunga foreign

Flexible ER lebih attractive dibandingkan Fixed Flexible ER lebih attractive dibandingkan Fixed? Pada short run benar, medium run? Pada medium run: economy reach the same ER and output, pada Fixed and Flexible ER Definisi real exchange rate:

Dua cara penyesuaian real ER: Perubahan E  hanya pada Flexible ER. Jika P dan P* tidak berubah dalam short run Perubahan relatif P terhadap P* pada medium run  Fixed ER

AD under Fixed ER Under fixed exchange rates, the central bank gives up monetary policy as a policy instrument. This is why the money stock no longer appears in the aggregate demand relation. At the same time, the fact that the economy is open implies that we must include a variable that we did not include when looking at the closed economy earlier, namely, the real exchange rate, ĒP/P*.

AD under Fixed ER Keseimbangan pasar barang: Y=C(Y-T)+I(Y,r)+G+NX(Y,Y*,ε) Real interest rate (r) sama dengan nominal interest rate minus expected inflation: r=i-πe Real exchange rate (Є) = Pada fixed ER, nominal ER fixed: E=Ē Pada fixed ER dan perfect capital mobility, domestic I sama dengan foreign i: i=i* Sehingga diperoleh:

Hubungan antara real exchange rate, government spending dan pajak: While the sign of the effect of the price level on output remains the same, the channel is very different: In the closed economy, the price level affects output through its effect on the real money stock, and in turn, its effect on the interest rate. In the open economy under fixed exchange rates, the price level affects output through its effect on the real exchange rate.

Equilibrium in the short run and in the medium run Aggregate supply (AS) relation: The price level P depends on the expected price level Pe, and on the level of output Y. There are two mechanisms at work: The expected price level affects nominal wages which affect price levels. Higher output leads to higher employment, which leads to lower unemployment, higher wages, and higher price levels. Kurva aggregat supply menunjukkan nilai level harga yg diharapkan, berslope positif (Gambar 21-1)

Gambar 21-1. AD dan AS pada perekonomian terbuka di bawah regim fixed exchange rate Y A Output,Y Price Level, P Yn Peningkatan harga mendorong real appreciation dan penurunan output. Kurva AD berslope negatif, peningkatan output mendorong peningkatan harga. Kurva AS berslope positif

Gambar 21-2. Penyesuaian di bawah fixed exchange rates Price Level, P Terjadi pergeseran sepanjang kurva AS, mendorong penurunan harga pada real depreciation dan peningkatan output hingga pada tingkat naturalnya AS AS’ A B AD Y Yn Output,Y

So long as output is below the natural level of output, the price level decreases, leading to a steady real depreciation. In the short run, a fixed nominal exchange rate implies a fixed real exchange rate. In the medium run, a fixed nominal exchange rate is consistent with an adjustment of the real exchange rate through movements in the price level.

The Case for against a devaluation Price Level, P AS Penyesuaian dengan devaluasi  menggeser AD ke kanan, ekonomi ke C, output kembali pada tingkat natural ∆E>0 C A AD’ B AD Y Yn Output,Y

The case for devaluation is that, in a fixed exchange rate regime, a devaluation (an increase in the nominal exchange rate) leads to a real depreciation (an increase in the real exchange rate), and thus to an increase in output. A devaluation of the right size can return an economy in recession back to the natural level of output.

That the “right size” devaluation can return output to the natural level of output right away sounds too good to be true-and, in practice, it is. The effects of the depreciation on output do not happen right away. There is likely to be a direct effect of the devaluation on the price level.

2. Exchange rate crises under fixed exchange rate Suppose a country is operating under a fixed exchange rate, and that financial investors start believing there may soon be an exchange rate adjustment: The real exchange rate may be too high, the domestic currency may be overvalued. Internal conditions may call for a decrease in the domestic interest rate, a decrease in the domestic interest rate cannot be achieved under fixed exchange rates.

Under fixed exchange rates, if markets expect that parity will be maintained, then they believe that the interest parity condition will hold; therefore, the domestic and the foreign interest rates will be equal.

Expectations that a devaluation may be coming can trigger an exchange rate crisis. The government and central bank have a few options: They can try to convince markets they have no intention of devaluing. The central bank can increase the interest rate. Eventually, the choice for the central bank becomes either to increase the interest rate or to validate the market’s expectations and devalue.

3. Exchange rate movements under flexible exchange rate The current exchange rate depends on: Current and expected domestic and foreign interest rates for each year over a given period. The expected exchange rate at the end of the period.

3. Exchange rate movements under flexible exchange rate Interest parity condition: Atau Untuk tahun t, maka persamaan exchange rate menjadi: Exchange rate expectation tahun t+1:

Exchange rate expectation tahun t+2: Exchange rate expectation tahun t+n: This relation tells us that the current exchange rate depends on two sets of factors: Current and expected domestic and foreign interest rates for each year over the next n years. The expected exchange rate n+1 years from now.

Exchange Rates and the Current Account Any factor that moves the expected future exchange rate moves the current exchange rate Et. Indeed, if the domestic interest rate and the foreign interest rate are expected to be the same in both countries from t to t+n, the fraction on the right of is equal to one, so the relation reduces to Et = .

Exchange Rates, and Current and Future Interest Rates Any factor that moves the current or expected future domestic or foreign interest rates between year t and t+n moves the current exchange rate.

Exchange Rate Volatility The relation between the interest rate it and the exchange rate Et is all but mechanical. A country that decides to operate under flexible exchange rates must accept that it will be exposed to fluctuations over time.

Choosing between exchange rate Exchange rate regime tidak masalah dijangka menengah, tapi bermasalah di jangka pendek  di jk pendek di bawah fixed exchange rate dan perfect capital mobility, interest rate dan exchange rate diserahkan pada pasar  mendorong krisis exchange rate Antisipasi dengan fixed exchange rate mendorong investor meminta interest rate dinaikkan  ekonomi memburuk dorongan devaluasi Dgn flexible exchange rate, exchange rate bergerak bebas dan mungkin sulit dikendalikan dengan kebijakan moneter Mana yang dipilih????

Flexible Exchange rate lebih disukai, kecuali: Ketika kelompok negara telah terintegrasi, currency yang sama  solusi Ketika bank sentral tidak lagi dipercaya bertanggung jawab atas kebijakan moneter pada flexible ER. Pada kasusu ini, Fixed ER seperti Currenct board dan dolarisasi solusi

Common currency area: Jika beberapa negara memiliki masalah makroekonomi dan gangguan yang sama  kebijakan sama. Optimal currency area (Mundel): Sekelompok negara mempunyai masalah (shock)yang sama Atau, atau jika masalah berbeda, mobiltas faktor produksi tinggi Euro? External shock yang berbeda dan labor mobility rendah

Hard Pegs, Currency Boards dan Dollarization Jika negara dengan inflasi tinggi karena tidak dapat membiayai defisit anggaran selain meningkatkan S uang. Untuk mengerem pertumbuhan uang  fix ER Implikasi: Fixed ER merupakan salah satu paket regulasi makro Membuat secara simbolis dan teknis susah untuk merubah paritas harga, hard peg  dolarisasi

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