Discussion 2 Write Up Mathematics & Economics Essay

Discussion 2 Write Up
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Discussion 2 Write Up
The discussion focused on fixed exchange rate and market deficits. It explained the nature of the bands the Bretton Woods system set up to allow exchange rates to fluctuate. Under the system, central banks have to maintain fixed exchange rates between the dollar and their currencies. They also intervened in foreign exchange markets, allowing the exchange rates to fluctuate. In this regard, a "crawling peg" was also introduced as a type of fixed exchange rate. Crawling peg refers to a type of a monetary regime which enables fluctuation of the exchange rate of the national currency. It is a fixed exchange rate because the central banks try to keep the exchange rate from moving beyond the set band.
It was also established that the authors argue for the impotence of monetary policy under a fixed exchange rate. This is because a fixed exchange rate ensures the currency is stable, and enables investors to understand which currency is worth. As such, foreign direct investors are attracted to the country’s businesses. However, a fiscal policy not be a good substitute for monetary policy since it can lead to reduction in government spending, thus result in reduction in the money that is in circulation. Some of the long-term effects of this include high levels of unemployment and a sluggish economy.
Further, capital mobility contributes to the impotence of monetary policy. It prevents the possibility of independence of the monetary policy, and this means that domestic interest rates cannot move independently without being influenced by foreign interest rates. Consequently, the domestic currency depreciates. The concept of sterilized monetary policy and why the authors called sterilized money interventions smoke and mirror evaluated. It was shown that sterilization monetary policy refers to a policy which aims at holding the domestic money supply so that it remains unchanged in spite of external shocks. Authors refer to it as smoke and mirror since it exerts modest and long-term impacts ...