Author Question: A krone/euro peg alone is A) not enough to provide automatic stability in the face of any ... (Read 16 times)

abern · **on:** Jun 30, 2018

A krone/euro peg alone is

A) not enough to provide automatic stability in the face of any monetary shocks that shift the AA schedule.
B) enough to provide automatic stability in the face of any monetary shocks that shift the AA schedule.
C) not enough to provide automatic stability in the face of any monetary shocks that shift the AA schedule, provided fiscal policy will be used as well.
D) enough to provide automatic stability in the face of any monetary shocks that shift the AA schedule, provided the government runs a budget deficit.
E) enough to provide partial stability in the face of smaller monetary shocks that shift the AA schedule.

Question 2

What has been learned since 1973 with regards to the experience with floating exchange rate regime?

What will be an ideal response?

aruss1303 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

(1 ) Monetary policy autonomy: Yes, however, floating rate did not insulate countries completely from foreign policy shock. In addition, no central bank can be indifferent to its currency's value in the foreign exchange market, thus the name dirty float rather than clean float.
(2 ) Symmetry: No, the dollar remains an important currency; the DM and the yen have gained importance; the British pound declines in importance.
(3 ) The exchange rate as an automatic stabilizer: Good performance of the flexible regimes; many believe that, otherwise, major realignments of exchange rates should have taken place. However, some sectors suffered, such as agriculture.
(4 ) Discipline: Did countries abuse the autonomy afforded by floating rates? Inflation rates did accelerate after 1973.
(5 ) Destabilizing Speculation: Floating exchange rates have exhibited much more day-to-day volatility than the early advocates of floating would have predicted. However, exchange rates are assets prices and so considerable volatility is to be expected. Over the long run, they do not seem to support the notion of destabilizing speculation.
(6 ) International trade and investment: Critics of floating claimed that international trade and investment would suffer as a result of the increased uncertainty. This prediction was certainly wrong. The use of forward markets and other derivatives expanded dramatically. Still, some economists disagree about the benefit to international trade.
(7 ) Policy coordination: Floating exchange rates have not promoted policy coordination.