Exchange rate parity
Exchange rate parity ( parity or currency parity , English par value ; Latin paritas, equality ) is the ratio of two national currencies, which is expressed in the exchange rate. In economics , it is the precisely determined exchange ratio determined by a state decision in a system of fixed exchange rates between two currencies or between a currency and a reference value ( gold , silver , special drawing rights ) . Colloquially, it is mainly to be understood as the actual exchange ratio for the euro - dollar or the franc- euro exchange rate.
General
Exchange rate parity is related to the exchange rate, which shows the exchange ratio of two currencies. The exchange rate expresses the economic conditions of a state, in particular its economic strength and export and import situation. If the economic power of a state increases, the exchange rate of its currency usually rises in relation to the exchange rates of the other currencies and vice versa. For this reason, the exchange rates - like all other rates - do not remain permanently stable, but fluctuate due to the changing supply and demand for currencies. An equilibrium exchange rate on the foreign exchange market only remains stable as long as export supply and import demand at home and abroad do not change. For the purpose of better calculability in foreign trade, a system of fixed exchange rates was created, the fixed exchange ratio of which is called exchange rate parity.
history
Originally, most currencies had a fixed value relationship to the coinage metals , especially silver and gold. The commercial value of these gold or silver coins corresponded to their metal value ( Kurant coins ). With the increasing importance of paper money , it became necessary to set a certain exchange ratio of a currency to gold. With the beginning of international trade and the emergence of national currencies, the problem of the exchange rate began as a barometer of the different economic strengths of different countries. The economist Adam Smith first examined exchange rate parity in his book The Wealth of Nations , published in March 1776 . "If the exchange rate between two places, like London and Paris, is al pari , it should be a sign that the debts of London against Paris are being offset by the debts that Paris has against London." He also recognized that the The exchange rate is not determined solely by the trade situation, but is also based on the “debt situation” of these countries. With flexible (real) exchange rates and a lack of international capital flows , supply and demand for a foreign currency usually lead to an exchange rate that results in an international division of labor according to absolute (Adam Smith) or comparative advantages ( David Ricardo ). Johann Karl Adam Murhard recognized in 1831 that the importers of a country would satisfy the exporters with bills of exchange even without an export ban on precious metals , as long as the exchange rate was favorable. Imports are therefore possible as long as there are equal exchange rates.
The gold standard began with the resumption of cash payments at parity ("at the parity") by the Bank of England in 1821. It obliged central banks of all major industrial nations to issue a certain amount of gold when presenting paper money to its holder . This gave a fixed reference value for currency exchange by defining the amount of gold for each currency unit. This gold parity remained in the basic system until 1931.
The International Monetary Fund (IMF) created a system of fixed exchange rates for the first time in July 1944, in which its members agreed on administratively fixed US $ currency parities and / or gold parities. The US $ currency parity indicated how many units of a foreign currency corresponded to one US dollar. The parities of the other currencies can be calculated using the gold parities and / or US $ parities. This created a system of fixed exchange rates between the member countries. This made gold a common measure of value for all currencies. This link between gold and exchange rate parities also made it necessary to restrict gold trading. In May 1949 the IMF set the first exchange rate parity at 3.33 DM = 1 US $; in September 1949 the IMF parity was already at 4.20 DM due to the devaluation of the DM. In March 1961 it fell due to the first revaluation of the DM to DM 4.00, the second revaluation followed in October 1969 to DM 3.66, a third in December 1969 to DM 3.22. The internationally agreed adjustment of exchange rate parities in December 1971 ( Smithsonian Agreement ) and the dollar devaluation by 10% in February 1973 were attempts to save the parity system. In a televised address on August 15, 1971, US President Richard M. Nixon unilaterally denounced the IMF's Bretton Woods Agreement . On December 12, 1971, the gold parity became finally obsolete. In March 1978 the IMF announced that only 38 of its 138 member states had opted for floating , 95 based on a reference currency (mostly US $) or a basket of currencies (mostly special drawing rights of the IMF).
The GDR government set a gold parity of 0.399902 g fine gold for the DM-East , which translates into a parity of 1 DM-East = 1.80 DM-West. From January 1959 the conversion coefficient - based on a parity of 1 DM-West = 1 currency mark - was 1 ruble = 4.67 currency mark or 1 dollar = 4.20 currency mark. Even then it was controversial whether the relationship between the price levels ( purchasing power parity ) was correctly reflected. Changes in parity would reveal productivity gaps and the lack of competitiveness in the GDR economy. The parity of the DM to the GDR mark was 1: 4.4 in intra-German trade in February 1990, it was 1: 8 to 1: 9 on the free market.
In October 1968, the constant downward pressure on the US dollar made it necessary for the Bundesbank to discontinue its interventions; in March 1979, block floating was transferred to the European Monetary System (EMS). Since then, the parities with the highest and lowest rates have been set over the ECU by means of a currency basket. From March 1979, the core element of the EMS was a system of bilateral exchange rate parities between the members, which were based on the DM as the strongest currency. It was replaced in January 1999 by the introduction of the euro , which is characterized by fixed currency parities for the member currencies. These parities were set by the Finance Ministers on December 31, 1998 on the basis of the ECU parities. Since then, the exchange rate parity has been DM 1.95583 = 1 euro.
species
A distinction is made between exchange rate parity and cross rate. Exchange rate parity is characterized by a fixed exchange ratio to another currency, a currency basket or the special drawing rights of the IMF. The cross parity for currency b results from the quotient of the currency parity WP of the country (WPb) and the currency parity of the other country (WPa):
Establishment and compliance
The determination of an exchange rate parity is done by sovereign act of the government or central bank. The parity should be based on economic fundamentals and create an equilibrium between two currencies (parity), but political interests play a major role in determining or changing it. At the same time, ranges are set around which the exchange rate may fluctuate in line with market developments. This bandwidth is a percentage that is equal to above and below parity. The uppermost limit of the range is called the upper intervention point , the lowest correspondingly the lower intervention point . The central banks are obliged to ensure by buying foreign currency at the lower intervention point or selling foreign currency at the upper intervention point that exchange rate parity is maintained across the range. As a result, the central bank takes over supply surpluses in its foreign currency holdings by buying foreign currency or covers excess demand at the expense of its currency holdings. The maintenance of parities can therefore only be achieved in the long term through the intervention policy of the central banks. The parities are maintained on the foreign exchange markets through the intervention of the central banks to have to buy a certain foreign currency at the lower intervention point or to sell it at the upper intervention point and thus contribute to the stabilization of exchange rates.
This system forced the central banks of the IMF member states to maintain the agreed parities by intervening in the foreign exchange market. However, the system overlooked the problem caused by the different economic development of the members. This changed the actual exchange rate and forced appreciating countries like Germany to permanently buy US $ on the foreign exchange market and depreciation countries to sell the dollar accordingly. However, this also had national effects on the money markets concerned , since intervention buying resulted in an expansion of the money supply through active money creation and brought about inflationary effects. A government could only propose to the IMF a change in parities through revaluation or devaluation if this was to remove a fundamental imbalance (“fundamental disequilibrium”).
purpose
Exchange rate parities ensure calculation security in foreign trade because fixed exchange rates are price-neutral. Imports and exports are made easier because trading partners can rely on fixed income for a longer period and currency risks are largely eliminated. Rigid parities, however, ignore a potential economic gap with fundamental balance of payments imbalances between countries, which is reinforced by political considerations not to undertake devaluations. Rigid exchange rates carry the risk of imported inflation, which can also contribute to domestic inflation. Foreign trade surpluses due to parity require an appreciation of the own currency (increase of the parity exchange rate, decrease of the parity exchange rate) and vice versa. Exchange rate parity presupposes a largely equilibrium economic power of the participating states. Using the example of the Greek crisis , it can be seen that the considerable economic differential was not apparent due to the lack of a devaluation option and that a compensation of the negative trade balance is impossible due to the lack of exchange rate mechanisms. Except within block currencies, fixed parity exchange rates are rarely found today, for example between Canada and the USA. The Canadian dollar has been discounted to the US $ since 1939 because Canada's dependence on exports from the USA makes it difficult to maintain stable parity between the two currencies in the long term. In NAFTA, the aim is to achieve parity for South American currencies.
Individual evidence
- ↑ Helmut Kahnt, Bernd Knorr: Old dimensions, coins and weights. A lexicon. Bibliographisches Institut, Leipzig 1986, licensed edition Mannheim / Vienna / Zurich 1987, ISBN 3-411-02148-9 , p. 394.
- ↑ Manfred Borchert, Außenwirtschaftslehre: Theory and Politics , 1977, p. 112.
- ↑ Adam Smith, The Wealth of Nations: Volume Two , 1776, p. 29.
- ^ Adam Smith, On the Elements of National Wealth, and on State Economics , 1806, p. 141.
- ^ Johann Karl Adam Murhard, Theory and Politics of Commerce , Volume 1, 1831, p. 341.
- ↑ Doris Niedermeier, Introduction to Money and Foreign Exchange Trading , 1989, pp. 2 ff.
- ↑ Helmut Lipfert , Introduction to Monetary Policy , 1973, p. 121 f.
- ^ Hauke Rath, Wirtschaft, Geld und Börse in the newspaper , 2000, p. 273.
- ^ Günter Stratman, The International Monetary Fund , 1972, p. 186
- ↑ Bernd Engel / Hans Herber, Economics for Studies and Banking Practice , 1983, p. 252.
- ^ Ernst Baltensperger / Werner Ehrlicher / Rudolf Richter, Problems of Monetary Policy , 1981, p. 9.
- ↑ Andre Steiner, The GDR Economic Reform of the Sixties , 1999, p. 168.
- ↑ Claus Köhler / Gerhard Merk, Money Management. 2. Balance of payments and exchange rate , 1979, p. 76.
- ↑ Helmut Lipfert, Introduction to Monetary Policy , 1973, p. 115.