Exchange rate mechanism

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The exchange rate mechanism is a balance of payments adjustment mechanism that uses changes in the exchange rate to reduce balance of payments surpluses or deficits and thus leads to the restoration of balance of payments adjustment.

requirements

The exchange rate mechanism requires:

  1. Flexible exchange rates
  2. the balance of payments deficits must not have been caused by the economic policies of other countries (e.g. ongoing foreign exchange market interventions to artificially devalue the currency such as the monetary policy of Asian countries, ironically referred to as the " Bretton Woods II regime ").
  3. The export and import demand must elastically react ( Marshall Lerner condition and Robinson condition )

Mode of action

On the foreign exchange market , the foreign exchange supply results from exports of goods, exports of services and imports of capital. The demand for foreign exchange results from goods imports, services imports and capital exports.

If there is a balance of payments deficit because more was imported than exported, then the demand for foreign currency increases. This leads to an increase in the price of foreign currency relative to the domestic currency and thus to a devaluation of the domestic currency. This in turn leads to a decrease in export prices and an increase in import prices and, given sufficient elasticity in export and import demand, to an increase in exports and a decrease in imports . This tends to balance the balance of payments. Because an increase in exports leads to an increase in the supply of foreign currency and a decline in imports to a decrease in the demand for foreign exchange, an equilibrium is restored in the foreign exchange market.

See also

J curve

Individual evidence

  1. ^ Springer Gabler Verlag, Gabler Wirtschaftslexikon, exchange rate mechanism
  2. ^ Rainer Fischbach, Volker Letzner, Volkswirtschaftslehre 2: Volkswirtschaftsheorie und -politik , Oldenbourg Verlag, 2010, ISBN 9783486590944 , pp. 222, 223
  3. ^ Rainer Fischbach, Volker Letzner, Volkswirtschaftslehre 2: Volkswirtschaftsheorie und -politik , Oldenbourg Verlag, 2010, ISBN 9783486590944 , pp. 222, 223