Fixed exchange rate

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Fixed exchange rate (fixed exchange rate, fixed exchange rate, fixed exchange rate) is an exchange rate system in which a country sets a long-term fixed exchange ratio of its domestic currency to another foreign currency unit, a currency basket or gold . The central bank guarantees this ratio, since it buys and sells foreign currencies or gold at the fixed rate. Currency boards are one way to guarantee a fixed exchange rate . A well-known example was the exchange rates of the countries of the CMEA among themselves and - at least officially - to foreign currencies.

Development of selected exchange rates against the US dollar

Thematic classification

In principle, the various exchange rate systems are divided into free exchange rates , at which only supply and demand in the international financial markets determine the value of currencies among each other and central bank interventions are the exception, exchange rates fixed in a range (relatively fixed exchange rates) at which the central banks of the participating countries agree are obliged not to allow a participating currency to fluctuate more than within the previously determined framework (example: Exchange Rate Mechanism II ) and fixed exchange rates. The specific exchange rate system results from the exchange rate targets of the respective state or uniform currency area. Monetary union is an extreme case of fixed exchange rate pegs .

history

Founding years, world wars and the interwar period

Before the First World War , the system of fixed exchange rates existed in all economically important countries from around 1870. The value of individual currencies was fixed in relation to gold, this exchange ratio is known as gold parity . In Germany, for example, one mark was equivalent to 0.36 g fine gold , in England one pound was equivalent to 7.32 g fine gold and in the USA 1 dollar was equivalent to 25.8 grains (1.672 g) gold with 900 per mille by weight (or 1.5046 g fine gold) . After the arbitrage of the gold market ceased to exist in the First World War and paper money was issued without gold cover, exchange rates moved freely and very differently. After this period of flexible exchange rates, currency speculation, and hyperinflation , most countries returned to fixed gold parities by around the mid-1920s. This “uncoordinated return to gold parities with the consequence of over- and undervaluation of important currencies” turned out to be a heavy burden for the restored gold standard and consequently led to its complete collapse.

Bretton Woods

The agreement on the international monetary order of the post-war period, passed on July 22, 1944 in Bretton Woods , USA, ensured relative international stability and growth until the early 1970s. The US dollar became the international reserve currency with a gold redemption guarantee within certain parities. However, when the United States began funding the Vietnam War and its growing foreign trade deficit through the printing press, there was an excess supply of US dollars. The other countries had to buy up US dollars in order to keep their exchange rates or currencies stable. These changed relations ultimately led to the collapse of the Bretton Woods system in 1973 and the release of most exchange rates, although the actual end had already occurred in 1971 with the cancellation of the obligation to redeem gold by the American President Richard Nixon .

Today's intermediate forms

Many countries today lie between the extremes of fixed and flexible exchange rates, depending on the respective exchange rate targets. There are, for example, the intermediate forms crawling peg , exchange rate bandwidths , adjustable peg and dirty floating . In Europe, from 1979 to 1998, the European Monetary System was a mechanism that limited the fluctuations between the exchange rates of the participating currencies . In the event of major changes in the rates, the central banks of the participants were obliged to support the rates. A distinction is also made between the voluntary link to a key currency (e.g. the Argentine peso to the US dollar) and a monetary union , in which several states have a common currency and pursue a common currency policy.

As part of the European Economic and Monetary Union , with the introduction of the euro as book money in 1999, the national participating currencies became “ non-decimal sub-units of the euro ” and thus ceased to exist independently of the euro. Before new countries can introduce the euro, they must fix the rate of their national currency to the euro within a range within the framework of Exchange Rate Mechanism II .

Crawling peg

Exchange rates with ranges

Crawling pegs are exchange rate pegs with regular appreciation or depreciation depending on a certain index (e.g. divergence of inflation rates between domestic and international). Both revaluations and devaluations are announced in advance in order to provide a reliable basis for exchange rate expectations and to counteract currency speculation.

Adjustable peg

Adjustable pegs are exchange rate pegs with irregular, previously announced appreciation or depreciation. Here, for example, parity changes are permitted in the case of structural balance of payments imbalances (system of fixed exchange rates with gradual flexibility).

Exchange rate ranges

In the case of exchange rate ranges (relatively fixed exchange rates, exchange rates fixed on a range), exchange ratios between the currencies (parities) and fluctuation ranges (intervention times) are set. Within the range of fluctuation, the prices can develop freely through supply and demand.

Applications and mode of action

Appreciation

Appreciation of exchange rates

If your own exchange rate falls as a result of excessive foreign exchange supply, then the rate must be supported by foreign exchange purchases by the central or central bank ( revaluation ). The central bank would have to give up its own money and thus increase the monetary base . In the long run, the demand gap cannot be satisfied by the central bank, as otherwise there is a risk of inflation , even if there is a balance of payments surplus.

devaluation

Devaluation of exchange rates

If the exchange rate were to rise, the central bank would have to support the rate by selling foreign currency. Here the central bank would collect central bank money and thus reduce the monetary base ( devaluation ). If necessary, a devaluation would have to take place by increasing the exchange rate, since there is a risk of the own country's insolvency.

Advantages and disadvantages of fixed exchange rates

Fixed Exchange Rate Benefits

The advantages lie in the elimination of the costs for necessary forward exchange transactions to reduce or compensate for the exchange rate risk. Exporters, importers and companies have a fixed calculation basis, as there are no exchange rate fluctuations and it is possible to influence imports and exports in favor of domestic economic goals through the increased effectiveness of fiscal policy . Furthermore, compared to variable exchange rates, fluctuations in employment in the export industry can be avoided and the risk of inflation reduced.

Disadvantages of fixed exchange rates

The autonomy in monetary policy is forcibly given up as an instrument. The domestic interest rate corresponds to that abroad, since a certain exchange rate must be maintained. If the inflation rate of the domestic or single currency area is higher than the inflation rate of the country to which the exchange rate is linked, the prices for domestic goods in relation to foreign goods would rise more strongly, which would lead to a real overvaluation. Furthermore, in contrast to flexible exchange rates, the balance of payments is not always balanced.

Fixed exchange rates using the example of China

Development of the Chinese yuan against the US dollar

The Chinese renminbi is one of the few currencies that had a fixed exchange rate until a few years ago. The yuan , often as the largest unit of currency as a synonym used for renminbi was pegged to the US dollar since the 1997th This meant that the US dollar could go up or down against other currencies, but the yuan always had the same value against the US dollar. After the yuan came under increasing pressure to appreciate in 2005, the Chinese government decided to peg it to a currency basket with a low fluctuation range as a first step. The renminbi appreciated by over 2% against the US dollar within a short period of time. According to experts, the yuan is still undervalued by up to 15%. Since artificially low exchange rates favor exports and inflows of foreign capital, it can be assumed in the short term that the exchange rates will not be released. In the medium to long term, however, experts believe that the yuan will experience complete convertibility and openness.

Individual evidence

  1. ↑ a b Hannelore Grill and Hans Perczynski: Wirtschaftslehre des Kreditwesen . 36th edition, Gehlen 2002, p. 461 ff., ISBN 3-4410-0303-9 .
  2. ↑ Hans-Joachim Jarchow: Theory and Politics of Money . 11th edition, Göttingen 2003, p. 446 ff., ISBN 3-8252-2453-8 .
  3. ↑ Manfred Borchert: Foreign Trade . 7th edition, Wiesbaden 2001, p. 427 ff., ISBN 3-409-63907-1 .
  4. ↑ Hanspeter K. Scheller: The European Central Bank. History, role and tasks (PDF; 2.6 MB) . 2nd edition, Frankfurt 2006, p. 27, ISBN 978-92-899-0026-3 .
  5. ↑ a b c Based on Udo Schmitz and Bernd Weidtmann: Handbuch der Volkswirtschaftslehre . 2nd edition, Stuttgart 2000, p. 243 ff., ISBN 3-1288-1832-0 .
  6. ^ Dietmar Dorn and Rainer Fischbach: Volkswirtschaftslehre II - Economics theory and policy . 2nd edition, Munich 1995, pp. 184 ff., ISBN 3-4862-2927-3 .
  7. ↑ China is releasing the yuan from the dollar , FAZ July 21, 2005, accessed on May 1, 2008.
  8. ↑ China is fighting the yuan appreciation , FAZ March 8, 2006, accessed May 1, 2008.
  9. ↑ Jim Rogers: Investing in China - How you can benefit from the world's largest market . Munich 2008, p. 42 ff., ISBN 3-8987-9311-7 .
  10. ↑ Jim Rogers: The Adventures of a Capitalist - The Discovery of Markets on a Trip Around the World . Munich 2005, p. 67 ff., ISBN 3-8987-9135-1 .

Olivier Blanchard and Gerhard Illing: Macroeconomics . 4th edition, Munich 2006, ISBN 3-8273-7209-7 .

  1. ↑ p. 590
  2. ↑ p. 591 ff.
  3. ↑ p. 593 ff.
  4. ↑ p. 629 ff.
  5. ↑ P. 594 ff. And 612 ff.
  6. ↑ p. 625

Hans-Joachim Jarchow and Peter Rühmann: Monetary Foreign Trade II - International Monetary Policy . 5th edition, Göttingen 1997, ISBN 3-5250-3174-2 .

  1. ↑ p. 17
  2. ↑ p. 76
  3. ↑ p. 89 ff.

Barry Eichengreen: From Gold Standard to EURO - The History of the International Monetary System . Berlin 1996, ISBN 3-8031-3603-2 .

  1. ↑ p. 41
  2. ↑ p. 71

Reinhold Sellien and Helmut Sellien (editors): Gablers Wirtschaftslexikon . 12th edition, Wiesbaden 1988, ISBN 3-4093-0386-3 .

  1. ↑ p. 1108 ff.
  2. ↑ P. 1772 ff.

literature

Web links

This version was added to the list of articles worth reading on May 15, 2008 .