Exchange rate range

In monetary policy , the exchange rate range is a fixed rate range within which an exchange rate may fluctuate freely against a key currency . This range is a systemic component of fixed exchange rates .

General

Exchange rates are a subset of rates that are generally allowed to fluctuate indefinitely in a free market economy . This is particularly the case with security prices ( stocks , bonds or investment certificates ). For reasons of a secure calculation basis for the market participants in the foreign exchange market (especially exporters and importers ), however, the member states of the International Monetary Fund (IMF) decided in July 1944 not to allow the exchange rates to fluctuate indefinitely, but rather to give them a small margin of ± 1% for Admit price fluctuations. This margin is limited by an upper and a lower intervention point.

history

The IMF first created a system of fixed exchange rates 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. In May 1949 the IMF set the first exchange rate parity at US $ 1 = DM 3.33 ; in September 1949 the IMF parity was already at DM 4.20 due to the devaluation of the DM. In March 1961 it fell due to the first revaluation of the DM to 4.00 DM, the second DM revaluation followed in October 1969 to DM 3.66, a third in December 1969 to DM 3.22.

In October 1968, the constant downward pressure on the US dollar made it necessary for the Deutsche Bundesbank to cease its interventions . The heterogeneous economic development of the western industrialized countries up to now made it impossible to stick to this system of fixed exchange rates, because the central banks had to intervene more and more frequently. Strong export nations like Germany tended to be suspected of revaluation, countries with a negative trade balance like the USA were potentially at risk of devaluation. Fixed exchange rates were first eased on September 30, 1969. 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 was finally abolished, on 17/18. December 1971 an agreement was made on the reorganization of exchange rates through so-called central rates as part of the Smithsonian Agreement . This involved increasing the exchange rate range from ± 1% to ± 2.25%.

On March 19, 1973, the European Economic Community began jointly block floating against the US dollar, which replaced the previously applicable fixed exchange rates in favor of freely fluctuating exchange rates. In March 1979, the 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. The EMS actually ended in July 1993 with the expansion of the exchange rate range from ± 2.25% to ± 15%. It was replaced in January 1999 by the introduction of the euro , which is characterized by fixed currency parities between the member currencies. Since the block floating, there are no longer any exchange rate ranges between the euro and other currencies, so that intervention points and intervention obligations of the central banks no longer exist.

In Exchange Rate Mechanism II, there are currently ranges of ± 2.25% for Denmark, in which the national currencies are allowed to fluctuate against the euro.

intervention

The IMF agreement obliged the IMF member states to strictly adhere to the agreed exchange rate range. This happened through the intervention of the central banks, which intervened in the market as foreign exchange buyers or sellers . For this purpose, there were two intervention points, which were above and below the mean spot exchange rate and were therefore called the upper and lower intervention point. The respective central bank had to buy the reserve currency by intervening in the foreign exchange market when the current exchange rate reached the lower intervention point and sell it as soon as the daily rate reached the upper intervention point due to market developments . Through this artificial demand or this artificial supply , falling below the lower and exceeding the upper intervention point could be prevented, which led to changed market data (foreign exchange spot rates). However, these interventions had a huge impact on the money market because the central bank's foreign exchange purchases resulted in an undesirable increase in the money supply and vice versa.

Market issues

The upper and lower intervention points are, from an economic point of view, fixed, administrative maximum and minimum prices that contradict a free market economy. They do not show the free interplay of supply and demand, but form a secure calculation basis for importers, exporters and other market participants and limit exchange rate risks . If, on the other hand, the foreign exchange markets are left to float , there are no bandwidths because the exchange rates are allowed to fluctuate freely.

Permanent interventions by central banks are an indication that the states concerned are exhibiting heterogeneous economic development. In the long term, this will not be eliminated through interventions in the foreign exchange markets or through appreciation or depreciation of currencies. Rather, the states must make greater efforts through coordinated economic policies to eliminate imbalances in their trade balances .

Individual evidence

1. ↑ Helmut Lipfert , Introduction to Monetary Policy , 1973, p. 121 f.
2. ^ Hauke ​​Rath, Wirtschaft, Geld und Börse in the newspaper , 2000, p. 273
3. ↑ Bernd Engel / Hans Herber, Economics for Studies and Banking Practice , 1983, p. 252
4. ^ Ernst Baltensperger / Werner Ehrlicher / Rudolf Richter, Problems of Monetary Policy , 1981, p. 9