exchange rates - Why a current account surplus is bond to lead to an appreciation of a currency?

I have got some confusion in trying to explain why a trade surplus is going to lead to an increase in the exchange rate. The usual logic goes as follows.Export X > Import MDemand for the country's currency increaseAppreciation happensWhat confuses me is step 2. Why the demand for the country's currency increase? I know that there is certainly a high demand for the country's currency because money is needed to buy its exports, but the demand is high does NOT mean the demand is INCREASING. Why can't the demand for the currency just stay high, but...Read more

What negative effects would result from globally fixing currency exchange rates?

Assuming one had the power to enact such a wide-ranging change, what would the negative effects of fixing the exchange rates between all currencies at the current rates, or the mean of the last week/month/year/whatever?The specific rates settled on are not the point of the question, nor how this could possibly come about. The crux of it is, how might this change to global finance harm human beings?Clearly, those companies and private individuals that make a living by shifting money around would no longer be able to do so. This is a given, no ne...Read more

Questions about the gold standard and exchange rates

So I'm a total economics noob and I'm trying to understand some of the consequences of using vs. not using a gold standard listed on Brad DeLong's blog here: The first point DeLong mentions is that with a gold standard an economy somewhat loses it's ability to stimulate growth by increasing the money supply. He gives the following example: the spring of 1995 the dollar weakened against the yen. Under ...Read more

Balance of payments and the free floating exchange rate system

I am a beginner economics student and recently, I have been learning about how balance of payments surpluses are important for a country to control the value of its currency using its accumulated foreign reserves. In the case of the free floating exchange rate regimes (e.g. Russia), by default, the foreign reserves account is empty. This makes perfect sense since the country does not need any reserve assets to manipulate the value of the currency. Does that mean to say that the balance of payments position is always "neutral" (i.e. neither defi...Read more

Interest rate parity: Counter intuitive

What is the basis for interest rate parity to hold?I know, the reason stated is excess returnsExcess returns as such should not be the reason for a currency depreciation. for e.g. when we posit that forward rate converge to the spot rates over time and back by arbitrage argument it is actually because forward prices, if less than spot prices, would result in an increase in the demand for forwards and subsequently increase its price. (talking about long positions here). Hence, in relation to interest rate parity, excess returns(which is wrongly ...Read more

exchange rates - What exactly is Foreign Currency Indexation?

As I understand it, foreign currency indexation (FCI) is when a government pegs its currency to another (usually the dollar), and their central bank buys or sells dollars to maintain a stable exchange rate between the two. The material I have to read for my class mentions FCI in the context of the Mexican tesobonos and other domestic debt that was issued linked to another currency. I am unable to find a resource online or otherwise that can distinguish between the two possible answers I'm given to the question "What is FCI":1. When a country is...Read more

How is it possible that all currency exchange rates are fixed w.r.t. to each other?

I wondered if it would be beneficial to exchange a currency through one or more "in-between" currencies.For example: instead of trading Russian Ruble (RUB) to Euro's (EUR), one would trade from RUB to US Dollars (USD) and then to EUR.Neglecting exchange costs, I expected that there would be some difference in the resulting amount of money.I tried this out in an Excel sheet, using data from Floatrates. I first imported an xml of all the RUB exchange rates (column C in the Excel).Then I imported an xml of all the EUR exchange rates (column G in t...Read more

exchange rates - Is there a difference between buying a currency and selling the currency to be converted to?

I'm not an economist. I'm looking to exchange my CAD to EUR. I watched the rates on a exchange office, and I found something strange:We buy: We sell:1 EUR = 1,4946 CAD (1) 1 EUR = 1,3280 CAD (2)1 CAD = 0,6691 EUR (3) 1 CAD = 0,7530 EUR (4)How can there be 4 different rates? I understand why CAD -> EUR is different of EUR -> CAD with the supply and demand. When the exchange office buys 1 CAD, it sells EUR too. I supposed it was to make things easier, so I checked it:1 EUR = 1,3280 CAD (2)=> 1,3280 CAD = 1 EUR1 CAD = 0,...Read more

Doubt in understanding the advantages of Fixed Exchange Rate

The author of my book writes: ADVANTAGES OF EXCHANGE RATE If exchange rates are fixed, then inflation may have a very harmful effect on the demand for exports and imports. Because of this, the government is forced to take measures to ensure that inflation is as low as possible, in order to keep businesses competitive on foreign markets. Thus, fixed exchange rate ensure sensible government policies on inflation. I don't understand this point and would be grateful if someone could explain it, perhaps with a real world example....Read more

Exchange Rate Determination

Most introductory international economics textbooks use the Uncovered Interest Rate Parity condition for deriving bilateral exchange rates. In other words, it is solely interest rate differential brought about by monetary policy that cause exchange rates to fluctuate, as investors demand/supply more attractive currency, which then adjusts exchange rate till the return in both currencies are equalized.The question is- how do trade in goods affect this phenomenon? For instance, say China increases money supply, effectively decreasing interest rat...Read more

exchange rates - Is there an accepted metric for "the value of the dollar"?

Is there a reasonably well-established scheme for estimating the value of the dollar in international trade, somehow relating it to the "average" of other currencies or to some currency-independent metric? Something that could be used when researching the relationship between fiscal policies and international trade.(I would consider using the Euro, but I'd like numbers going back to the 70s, at least, and obviously the Euro doesn't work for that. In addition, it is perhaps a bit destabilized by, eg, the Greek economic crisis.)...Read more

exchange rates - Justification for my Random Effects estimation

I need to defend my use of the Random Effects (RE) estimator in my economics project. I've been told in cross validated that the proper place for the question is here.The causal effect of the exchange rate on shopping in the neighbouring country, is estimated using the following equation:\begin{eqnarray}\ln⁡(\text{Traffic})_{i,t} &=& \beta_0+ \beta_1 \ln⁡(\text{Exchange rate})_t + \beta_2 \ln⁡(\text{Distance})_i \\&& + \beta_3 \ln⁡(\text{Exchange rate})\cdot\ln⁡(\text{Distance})_{i,t}+ \text{Month}_t \\&& + \beta_4(\tex...Read more

Question about maintaining fixed exchange rates

In my textbook, borrowing from abroad is listed as one of the method to increase the value of a currency by shifting its demand curve to the right. "If the country borrows from abroad, its loans will come in the form of foreign exchange, which when converted into [its currency] will cause an increase in the demand for [it] and hence a rightward shift in the demand curve toward D1."I (and a group of friends) am not quite sure how this works, given that borrowing from another country and converting the funds to their own currency should increase ...Read more