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Elements of Foreign Exchange: A Foreign Exchange Primer [Franklin Escher] on leondumoulin.nl *FREE* shipping on qualifying offers. Excerpt from the Preface.
Table of contents
- Elements of Foreign Exchange
- A Foreign Exchange Primer.
- Diagnostic information:
- Elements of Foreign Exchange : Franklin Escher :
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Elements of Foreign Exchange
Phrase Searching You can use double quotes to search for a series of words in a particular order. Finally, it is interesting to point out that most of the countries that changed their ERS most often are those whose economic performance was less satisfactory. Monetary Unification and the Transition to a Mixed Economy. In the context of the economies analyzed in the previous section, the choice of an ERS was usually only a part of a more comprehensive strategy to facilitate the transition to a mixed economy.
A Foreign Exchange Primer.
While important information see the section below on data issues is not available to make a definitive assessment on whether conditions existing in Cuba suggest that a monetary anchor associated with more flexible ERS or an exchange rate anchor associated with fixed ERS variants would be preferred, we can describe key issues going forward. In particular, in support of a fixed ERS:. On the other hand, while the initial credibility of the stabilization effort may be higher if the choice is for a harder peg that is associated with bringing down inflation and interest rates faster, it is likely that during the stabilization period, the Cuban economy would be hit by a number of real shocks including those derived from the implementation of structural reforms that may cause significant swings in the relative prices of traded to non-traded goods.
Thus, an ERS with some flexibility may be called for, even considering that swings in velocity will probably occur during the stabilization period. Ideally, if the objective is to bring down inflation, the scheme should establish a period within which exchange rate depreciations would occur but whose magnitudes would decrease pari passu with the consolidation in the core fiscal balance.
In this connection, a larger monetization of the fiscal deficit would require a larger increase in monetary base demand, for a given size of international reserve accumulation target, and thus would require larger pre-announced depreciation rates and vice versa. In other words, if the rate of crawl chosen is not consistent with the magnitude of deficit monetization and the objective of reserve accumulation, the result would be a decrease in the international reserve coverage of the unified monetary base, the need to postpone the lifting of exchange rate controls in the current and capital accounts transactions, and the likely increase in the exchange rate premium in the parallel market.
In the case of the additional complication that needed structural reforms and fiscal consolidation proceed simultaneously with currency unification, the choice of the ERS for the transition should accommodate the sequential pace of implementation. In Cuba, even though fiscal disequilibria have decreased significantly from the high levels observed during the first half of the s, fiscal deficits continue to be relatively high, and have averaged about 3 percent of GDP in the period — A possible sequence of rather general actions to be taken together with the adoption of an ERS for the unified Cuban currency could be as follows:.
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- Parrots (First animals Book 14).
The results of a number of simulations performed with a simple monetary model underscore the main elements of a possible unification scheme. The numbers for the main economic variables were chosen to resemble those in Cuba. Such values for the unification exchange rates result in an international reserve coverage of the unified monetary base of 80 percent. It further assumes that at the outset of the unification there is a fiscal deficit of about CUC1 billion.
The objective is to converge to a harder-peg after a number of periods assumed to be 12 in the simulation. It is also assumed that over this period: 1 there is increased reserve coverage of the unified monetary base; 2 the core fiscal situation is consolidated; and 3 the rate of crawl decreases over time as the fixing of the exchange rate in period 13 approaches, as convergence to a harder peg with associated low inflation rates seems most appropriate in the long run.
The simulations also point to some of the main challenges of a post exchange-rate unification scenario. Announcing a decreasing rate of crawl, without tackling the fiscal deficit, and without external support would result in decreases in international reserves, increases in domestic credit, decreases in the international reserve coverage of the unified monetary base, and a likely inflation burst towards the end of the transition period see upper left-hand chart in Figure 1.
If external support is available for financing part of the fiscal gap, but no fiscal consolidation occurs, the international reserve coverage would also decrease and an inflation burst would also likely occur towards the end of the transition period upper right-hand chart in Figure 1. If external support is coupled with gradual fiscal consolidation, the international reserve coverage of the unified monetary base will decrease at the beginning of the stabilization period, but as fiscal consolidation proceeds, it will stabilize and increase thereafter, pointing to a successful stabilization lower left-hand chart in Figure 1.
If in addition to external support and fiscal consolidation, the private sector increases its holdings of monetary base in real terms i. Data Isues in the Unification Process.
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All official national account statistics, as well as price levels, are measured in CUPs at official exchange rates. If national account statistics were converted to U. It can be noted that exceptions to this rule have been granted to small island economies such as Dominica and Grenada. Monetary unification should only proceed after some revamping of the way the price level is measured. The CPI basket should include goods purchased in all market segments, and prices need to reflect underlying opportunity costs.
This will likely result in a one-time jump of the price level and some realignment of relative prices. An analogous revamping would be needed for GDP deflators. Fiscal accounts also need to be expressed in a common currency to allow a sound assessment of future financing needs. Government revenue and financing include receipts in U. Cuban markets are very segmented. In addition, the government created the so-called Outlet System managed by the government itself in which goods mostly imported are sold at market prices plus heavy sale taxes quoted in CUCs.
Most basic services are provided for free by the government including education and health. Alongside formal markets, there exist informal markets, mainly in services. It is not clear whether national accounts include an estimate for these kinds of activities. Price level statistics appear to be compiled mainly for goods in rationed markets for which official price lists exist and do not cover developments in the more market-oriented segments of the economy.
As such, these price level statistics do not likely cover the consumption basket of the average Cuban citizen that probably comprises goods purchased in a variety of markets. Analogously, it is also likely that sources of monetary income for the average citizen come from a variety of sources in addition to that provided directly by the government.
The views expressed in this paper are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
Diagnostic information:
The functioning of the Cadecas has likely had a negative impact on the profits of traders in the parallel exchange rate market, though their existence should not be threatened so long as capital controls continue. Unfortunately, we do have official data on the BCC balance sheet.
Thus, what follows in this section is a methodology and issues for consideration in unifying the exchange rate, more than an exact menu of exchange rate value options, which would depend on the actual monetary base data from the BCC balance sheet. See, for instance, Zettelmeyer in Citrin and Lahiri Real shocks can be classified as internal for instance those related with structural reforms, changes in the profitability of non-traded vs.
Real shocks usually cause swings in the RER.
Elements of Foreign Exchange : Franklin Escher :
Table 4. These countries are mainly those of the former Soviet Republics of Central Asia. The implementation of a program of market reforms of which the adoption of a new ERS would likely be a part implies turning concepts into policies, which in turn will require paying attention to operational detail, as Sachs points out. Therefore, what it would otherwise appear to be simple concepts at the theoretical level, may turn into complex regulations.