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Article
Publication date: 1 February 1982

MICHAEL B. CONNOLLY

The Haitian gourde is one of the most curious and exotic currencies of the world. On it is printed the striking statement: “The banknote, in conformity with the Constitution of…

Abstract

The Haitian gourde is one of the most curious and exotic currencies of the world. On it is printed the striking statement: “The banknote, in conformity with the Constitution of the . Republic of Haiti, is payable to the bearer in legal money of the United States of America at the rate of five gourdes for one dollar.” Amazingly, the gourde stands exactly where it was set by the Convention of April 12, 1919 at five gourdes per dollar. This fixity in the exchange rate is a remarkable achievement of an otherwise totally squalid economy record, which has been made very much due to the total convertibility of gourdes into dollars and their easy co‐existence and use in Haiti. Such a feat runs counter to early suggestions in the newly developing currency substitution literature that currency competition promotes instability in rates. A very different story emerges due west on the largest English‐speaking island in the Caribbean, Jamaica, where monetary turbulence has been the rule since 1978. The currency there was initially backed 50 percent by pounds sterling when the Bank of Jamaica began operation in May 1961, but switched to a dollar peg in January 1973 at $1,10 US, a rate maintained through 1977. After the economic problems of 1976–77, the Jamaican dollar was devalued 15½ percent in January 1978 and, under the strong advice of the International Monetary Fund, a further 32 percent in May 1978. Following was a “crawling peg” devaluation of 1½ percent per month until October 1978, then 1 percent a month until May 1979, when the current dollar peg of 56.13 cents per Jamaican dollar was established. This dramatic decline in the currency was caused in part by expansionary monetary policies of the Bank of Jamaica monetizing budget deficits, and in part by the decline in tourism, the fall in bauxite and steel output, and the oil shocks Jamaica experienced. (From 1974 to 1979, the government budget deficit went from 168 million Jamaican dollars (J$) to 551 mill J$ with a peak of 625 million in 1978, holdings of government debt by the central bank from 72 to 898 mill J$, and net foreign assets or reserves of the central bank plunged from 141 to minus 778 mill J$ (Source: International Financial Statistics, IMF 1980 Yearbook and IFS January 1981 issue).) The International Monetary Fund set specific performance criteria such as devaluation and ceilings on government budget deficits for successive draws on a substantial loan of 351 million U.S. dollars or 360 percent of Jamaica's quota at the end of 1979.

Details

Studies in Economics and Finance, vol. 6 no. 2
Type: Research Article
ISSN: 1086-7376

Abstract

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The Exorbitant Burden
Type: Book
ISBN: 978-1-78560-641-0

Book part
Publication date: 1 January 2006

Patrick J. Schena

This paper explores the sensitivity of Chinese stock returns to changes in trade-weighted indexes of the renminbi (RMB) and the currencies of China's trading partners from 1999 to…

Abstract

This paper explores the sensitivity of Chinese stock returns to changes in trade-weighted indexes of the renminbi (RMB) and the currencies of China's trading partners from 1999 to 2003. It analyses this exposure elasticity cross-sectionally using accounting variables to proxy for size and costs of financial distress. It finds that internationally oriented Chinese companies have experienced exchange exposure particularly against the yen. It also finds that, against a trade-weighted index, there is no empirical evidence that Chinese firms are engaged in hedging activities. However, when exposures are measured in yen terms, it finds that Chinese firms, particularly exporters, engage in active currency hedging.

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Value Creation in Multinational Enterprise
Type: Book
ISBN: 978-1-84950-475-1

Abstract

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The Exorbitant Burden
Type: Book
ISBN: 978-1-78560-641-0

Expert briefing
Publication date: 27 January 2015

The longevity and outlook for currency pegs.

Article
Publication date: 1 April 2002

Mary Beth Stanek

Discusses the way countries can operate their exchange rate policies. Covers areas such as fixed exchange rates, floating rates and pegged rates, citing the advantages and…

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Abstract

Discusses the way countries can operate their exchange rate policies. Covers areas such as fixed exchange rates, floating rates and pegged rates, citing the advantages and disadvantages of each. Considers the example of the Euro‐zone countries and the problems they face. Looks at countries which use official dollar‐linked systems. Outlines the three primary types of risk exposure, transaction, economic and translation and presents some examples of how companies have mitigated risk. Briefly looks at rate forecasting. Concludes that a global market could lead to fewer currencies.

Details

Management Research News, vol. 25 no. 4
Type: Research Article
ISSN: 0140-9174

Keywords

Book part
Publication date: 8 March 2011

Ulrich Volz

This chapter examines exchange rate options for East Asian countries, taking into account their real economic linkages as well as their international financial relations…

Abstract

This chapter examines exchange rate options for East Asian countries, taking into account their real economic linkages as well as their international financial relations. Particular consideration is given to possible exchange rate cooperation within the region. For this purpose, the literature on the optimal peg is reconsidered and subsequently extended to include a country's international financial asset and liability situation. That is, instead of focusing solely on nominal or real effective exchange rates, the chapter proposes a blend of “real” and “financial” exchange rates for analyzing “optimal” exchange rate policy.

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The Evolving Role of Asia in Global Finance
Type: Book
ISBN: 978-0-85724-745-2

Keywords

Book part
Publication date: 13 May 2019

Rosaria Rita Canale and Rajmund Mirdala

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…

Abstract

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

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Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence
Type: Book
ISBN: 978-1-78743-793-7

Keywords

Book part
Publication date: 21 December 2010

Raul Razo-Garcia

This chapter deals with the estimation of the effect of exchange rate flexibility on financial account openness. The purpose of our analysis is twofold: On the one hand, we try to…

Abstract

This chapter deals with the estimation of the effect of exchange rate flexibility on financial account openness. The purpose of our analysis is twofold: On the one hand, we try to quantify the differences in the estimated parameters when exchange rate flexibility is treated as an exogenous regressor. On the other hand, we try to identify how two different degrees of exchange rate flexibility (intermediate vs floating regimes) affect the propensity of opening the financial account. We argue that a simultaneous determination of exchange rate and financial account policies must be acknowledged in order to obtain reliable estimates of their interaction and determinants. Using a panel data set of advanced countries and emerging markets, a trivariate probit model is estimated via a maximum simulated likelihood approach. In line with the monetary policy trilemma, our results show that countries switching from an intermediate regime to a floating arrangement are more likely to remove capital controls. In addition, the estimated coefficients exhibit important differences when exchange rate flexibility is treated as an exogenous regressor relative to the case when it is treated as endogenous.

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Maximum Simulated Likelihood Methods and Applications
Type: Book
ISBN: 978-0-85724-150-4

Article
Publication date: 11 February 2014

Peijie Wang and Bing Zhang

The authors make assessment on RMB valuation and to contribute to the fierce debate on this important issue, which is perceived to have a great effect on the improvement or…

Abstract

Purpose

The authors make assessment on RMB valuation and to contribute to the fierce debate on this important issue, which is perceived to have a great effect on the improvement or deterioration in trade balance. A triangular analysis approach is put forward and empirical assessment is made. The paper aims to discuss these issues.

Design/methodology/approach

A triangular analysis approach based on no arbitrage conditions for three currencies, and causality and influence analysis.

Findings

First, it has been found that the movements in the RMB dollar exchange rate do influence the dollar euro exchange rate and the former do have a causality effect on the latter, in both the long run and the short term. Second, it is implied that the RMB is overvalued vis-à-vis the US dollar, as the analysis suggests that an overvalued euro vis-à-vis the US dollar would imply a kind of overvaluation of the RMB vis-à-vis the US dollar, and by any conventional measures the euro has appeared to be overvalued vis-à-vis the US dollar, especially in the months before the last financial crisis.

Practical implications

First, the peg of the RMB to the US dollar that undervalues the RMB vis-à-vis the US dollar will not help promote China's overall trade balance or export even if undervaluation of currencies can ever help improve nations' terms of trade. Second, no stability in RMB exchange rates can be claimed by pegging the RMB to the US dollar, as the exchange rate of the RMB vis-à-vis currencies other than the US dollar would be as volatile as that between the US dollar and the euro and other convertible currencies.

Originality/value

A new triangular analysis approach in international finance research. First, there is an advantage to adopt this seemingly simple analytical framework: it is highly reliable; no triangular arbitrage conditions have to be met even under exchange controls, whilst PPP may not hold even with flexible exchange rate regimes. Second, it does away with the thinking confined to small open economies that has dominated academic research for so long and is totally inapplicable to the RMB case.

Details

China Finance Review International, vol. 4 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

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