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1、Lecturenotes:160Brevised5/7/01Lecture6:Fixedexchangerates(chapter17)Topics:MechanicsoffixedexchangeratesMonetaryPolicyFiscalPolicySterilization1)ForeignexchangemarketinterventionThemodelswehaveconsideredsofarassumethatexchangeratesareallowedtomovefreely.Butpriorto197
2、3,mostcountriestriedtoholdexchangeratesfixed,andmanydevelopingcountriesstilldotoday.Eventodaymanydevelopedcountriesinfluenceexchangeratesomewhattopreventlargefluctuations.Howfixexchangerate:Notjustamatterofdeclaringaparticularexchangerate,butacountry’scentralbankinte
3、rvenesintheforeignexchangemarkettoensureadesiredexchangeratelevel.Thecentralbankmustalwaysbewillingtotradethecurrencywithparticipantsintheforeignexchangemarketattheofficialrate,andabsorbwhateverexcesssupplyorsatisfywhateverexcessdemandexistsatthatrate.Meanswillbedecr
4、easingorincreasingMStopinEatdesiredlevel.a)BalanceSheetsofcentralbankLookatmechanicsofcentralbankinterventioninforeignexchangemarket.Usebalancesheetofcentralbank,showingassetsandliabilitiesAssets:holddomesticassets:domesticbonds(treasurybills-getpaidacertainnumberofd
5、ollarsinfuture)Holdbondsissuedbyforeigngovernments,denominatedinforeigncurrencyLiabilities:privatebanksgivedeposits,whichprivatebanksownandcanwithdraw.Alsodomesticcurrencyincirculation.Assets
6、LiabilitiesForeignassets$1000
7、Depositsheldbyprivatebanks$500Domesticassets$
8、1500
9、Currencyincirculation$20001TypicalOpenmarketoperations:Perhapsrecallthisfromearliermacroclasses.Monetarypolicytakesformofopenmarketoperations.TodecreaseMS,selldomesticassets,say100$worth,andget100$incashinexchange.Leadtofollowing,inwhichMSfallsby$100.Assets
10、Liab
11、ilities
12、Foreignassets$1000
13、Depositsheldbyprivatebanks$500Domesticassets$1400
14、Currencyincirculation$1900Foreignexchangeintervention:Considerifwanttomakevalueof$appreciaterelativetoforeigncurrency.Wanttoincreasesupplyofforeigncurrencyanddecreasesupplyofhomecurrency.Dot
15、hisbysellingforeigncurrencyandtakingbackhomecurrency.SocantakesomeofForeignreserves(denominatedinforeigncurrency),andsellthemfor$,s
