Exchange Rate Policy and Debt Crises - Assignment Example

By The of the The of the School The and where it is located The a) Thevariation in the exchange rates crisis amongst the advanced countries observable from the graphical portrayal of the various groups of countries with group one having : Britain, Portugal, Italy Sweden , Spain and Finland . For the advanced countries, fall of the Portugal currency (escudo) exhibited the most gradual fall followed by Spain. Fig .a Contrary to the rest of the currencies , British pound indicated drastic fall but quickly recovered from the fall as it fall by -15% but by 1993, the currency had gained 5% recovery to be the top most country with a laudable results. By the end of the year 1993, Portugal’s (Escudo), Italy’s (lira), Sweden (Krona), Spain’s (peseta) and Finland’s (Markka) were still directed for a deep fall. Finland’s (markka) assumed the greatest fall close to -25%, followed by Spain’s (peseta) at adjacent -24%, Italy‘s (lira) at -20%. Close to 1993, all the three country currencies indicate instrumental growth which eventually declines or falls (Robert & Alan, 2011, Pp345). Fig. b As observable from figure b, the recovery of the Britain pound takes a shorter duration as compared to Portugal (escudo), Italy (lira), Sweden (Krona),Spain (peseta) and Finland (Markka). Close to Britain is the Portugal’s (escudo). Fig .c With reference figure c the emerging markets are mainly Mexico , Thailand Korea, Brazil , Russia And Argentina. The recovery of their currency indicated pathetic endeavors to emerge above -30 % following the aftermath of the currency crisis in their respective years. Argentina currency crisis in 2001 and Russia case in 1998 were debilitating to the two countries. The fall in the currency was steady to -80 %. Emerging markets are indicated by presence of large falls or depreciation in the currency ranging from -30 to close to -90 % fall in with regards to currency crisis while advanced countries have small fall in their currencies from ranging to close -25% and quick recovery as indicated in figure b. With reference to the graph on deviation of curves of the various countries’ currencies, the emerging nations exhibit a slower than normal recovery (Jajah & Montiel, 2003, Pp54). The advanced nations in this category are British which recovers quickly from the deepening effects of the currency crises. All the remaining countries exhibits slow than normal recovery from currency slow growth rate. b) From the listed countries economic costs are very high in emerging countries. This group includes Mexico, Thailand Korea, Brazil, Russia and Argentina. The countries are characterized by currency crisis between -30% to -90 % thus exhibiting conspicuous effects of currency crisis. Balancing of the foreign exchange roles become complex to aid in the conforming the standards of the currency stability to the required ranks. Ritualistically, exchange rate crises have adverse effects on the country’s economic costs. The effects range from stagnation the growth rate of the country’s economic positions. While the listed emerging economies indicate destabilized economic conditions after the currency crises, the advanced countries emerge swiftly from the paralyzing condition s of the effects of the currency mishap. In the emerging economies, the currency crisis instills augmented economic effects on the general management of the economic activities. This was observable from economic scenario witnessed in Argentina after the 2001 to 2002 in which presence of news on increased unemployment reigned. Consequently, the country suffered great effects of poverty, hunger, financial ruins and deprivations. For the country, the economic recovery was quite swift, but the pinch effects are still notable in the country’s history. The effects of the currency crises are extremes to the banks as books of account become unbearably hard to manage. This results into banking crisis which refers to the insolvency of the market (Piersanti, 2012, Pp65). c) Depreciation prompts the expansion of the growth on the exports and thus is symbolic in case b. While this feature should promote the growth of the economy and instead prevent the political crisis, it acts in the contrary manner. The depreciation of the currency which is the decrement on the exchange rate creates a reduction in the value of the local currency thus exposing the local goods to the foreigners at a cheaper rate as compared to the earlier rating. The foreign goods are hence portrayed as expensive and less affordable to the locals. Political crisis is inescapable considering that goods sold at cheaper rates only indicates less income to the local country despite the cost of input being too high and in comparison to the final rewards accrued from the sales of the goods produced . The balance of the revenue derived from the sales and the corresponding costs entailed in the process of the manufacturing the goods indicates debilitating feature that is quite undesirable feature to any nations. The effects of the financial instability or depreciation of the currency presents entirely conflicting and challenging scenario that brings with repercussions that are not easily controllable. The fall of the local currency enslaves the country whose currency has depreciated to the other country whose currency is stable. Superior currency informs more consumption of goods and services from the country with weak currency which may indicate corresponding growth in the economy of the country from goods are consumed. With less income revenue the country, the country only accumulates less revenue to facilitate its international sales. For goods whose raw materials are imported, the production would have to stop thus inflicting the markets wounds that are not easily curable. Most countries would opt for borrowing in order to settle the difference the fiscal scenario, but cases only exhibits tougher financials ahead with increment in the liability. d) With reference to graphs, Mexico, Thailand Korea, Brazil, Russia and Argentina are most likely to adopt the fixed and pegging of the is currency to cushion their investor against extreme currency fluctuations. Most considerably, the pegging of the currency is associated with maintenance of the stability of the currency. The variation is the exchange rates can be handled solely under the use of the pegging as most the efficient model. While a times the pegging may ineffective in countering the effects of the currency crisis. The country is also to entail pegging of their currency to evade the impacts of the inflation and deflations in case such scenarios occur. The pegging process may also have catapulted effect of expanding demand which the prompts great dependence on the currency and maintenance of the confidence levels for the product. The countries should prepare themselves for the undoing effects of the pegging of currency since it become very unbearable to manage in future roles (Robert & Alan, 2011, Pp345). Fixed regimes are complex to maintain as notable in historical scenario in Mexico (1995) and Russia (1997). The attempts to maintain the corresponding value of the currency resulted in their local currency becoming overvalued. This exhibits a condition under which the local government is typically unable to convert their currency to the pegged value. This creates unexpected panic as the investors adopt hastened mechanism to retrieve their investments from the local currency quickly before the local currency finally plummets below the pegged value (Robert & Alan, 2011, Pp345). With regards to Mexico’s case, the government was compelled to lower the price of the peso to 70% of its earlier price. Pegging of the currency has been also important in evasion of eminent commitment of the currency thus aiding in reduction of the certainties of banking crises. Objectives laid by the policy makers in the design of the respective exchange rates includes very relevant criteria of establishing tangible policies that in inhibit the eventual erratic outcomes that may shock the market and it eventual guidelines. The transparency established by the excellent policies enables uplifting of the standards of the credibility for future scenarios (Robert & Alan, 2011, Pp345). The choice of exchange rate model is hugely dependant on the whether the country attaches itself on either large or lower inflation as the ability to import the stability of the price is also possible. This importation feature has been notable in numerous other models. The demerits of the fixed exchanges rates of which these countries should be prepared for is the eve expanding inability of the governmental ability to regulate the or monetize the fiscal deficits in case a country operates in deficits. Pegging of the currency has it retrogressive models and therefore most would rather adopt proper models in the capital markets regulations process to counter the effects of the market. Other regulatory bodies are also instrumental in maintenance of the outstanding levels of the of currency stability. In case the devaluing of the currency is inescapable then further adopted models are significant in maintenance of the economic standards. This outline includes implementation of greater levels of transparency in the attempts of strengthening the financial institutions. Campaigners for fixed rates of exchange outline critical points in backing their outlines. The process facilitates extensive reduction in uncertainty. The importers and exporters of goods are most likely to carry out business under extensively secure grounds with involvement of the fixed rates. Any country engages in business with the rest of the countries and most countries aspire to establish comprehensive ambience of financial market structure. The adoption of the model is relevant in promotion of international trades. The fixed rate structure avails supportive structure for nominal anchoring of the corresponding price level. Entailment of the fixed rates only aids in the instilling of the monetary policies relevant for the market system. e) The currencies of Mexico (Peso), Thailand (Baht), Korea (Won) and Brazil (Real) indicate twice or more than twin drops from initial currency falls in their respective years. This indicates extensive risks of a repeat of additional currency crisis in future their categories. The curves indicate downward fall which indicates disillusioning trend for the countries. Typically, a great number of countries choose to apply a floating peg in which case the government reassesses the pegged value periodically and thus adjusts the pegged value consistent with prevailing market dimensioned priced and the that value which the government feels comfortable with. The effect of this case is the unprecedented devaluation, but it must be placed in course to revert any dangers of eventual crisis in case of any eminent future currency threats. The pegging has been widely applied in maintaining the stability of the monetary value, the practice was highly in application during the session when all major economies exercising in the same proportion. While introduction of reforms on the exchange rate policies have indicated prosperous merits various nations adamantly opted to either undertake their reforms in slower manner or not to take any measures at all. Most countries have ensured maintenance of large financial reserves ensure currency crisis security (Robert & Alan, 2011, Pp345). Bibliography Robert C. Feenstra and Alan M. Taylor, International Economics, Worth Publishers: 2nd Revised Edition, International Edition (13 April 2011). Piersanti, G. (2012). The Macroeconomic Theory Of Exchange Rate Crises. Oxford, Oxford University Press. Buiter, W. H., Corsetti, G., & Pesenti, P. A. (1995). A Center-Periphery Model Of Monetary Coordination And Exchange Rate Crises. Cambridge, Ma, National Bureau Of Economic Research. Jajah, S., & Montiel, P. (2003). Exchange Rate Policy And Debt Crises In Emerging Economies. [Washington, D.C.], International Monetary Fund. Http://Catalog.Hathitrust.Org/Api/Volumes/Oclc/52091585.Html. Read More