Essay Example on Should a central bank use its currency reserves to support the value of its Currency

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Should a central bank use its currency reserves to support the value of its currency in the currency market What can be achieved with this intervention Description of the exchange rate systems https www elblogsalmon com conceptos de economía que son los tipos de cambio Exchange rates can be defined as the price of a foreign currency unit expressed in terms of the national currency You can express the price of our moneta in terms of another foreign currency an example would be the value of euro on the dollar would be 1 35 it also happens in the opposite case that 1 dollar is equal to 0 74 Euros This comparison can be given in all currencies that exist in the world in short are the ways in which monetary transactions are currently made Within exchange rates we can speak of two types Real exchange rate it is in which the relative price of goods and services is valued depending on the amount

On the other hand according to the situation of the currency of each of the countries in which these goods and services are generated Nominal exchange rate It is the variation over time of the values of a certain currency or currency depending on another Exchange rates can not only be variable there are also fixed or semi fixed exchange rates This is what happened in the European Monetary Union with the arrival of the single currency all countries carried each of their currencies at a fixed exchange rate with the single currency the euro Who says how much it costs to buy a foreign currency Who puts value on the dollar euro The government of each country decides the system of change that it will have and from that system depends who puts value to the currencies There are three types of exchange systems The fixed flexible and finally managed exchange rate The exchange rate is the price that must be paid to buy a foreign currency The fixed exchange rate occurs when it is the Central Bank that establishes the value of the currencies or currency of the other countries only the Central Bank can modify it and it must be through a law

On the other hand when the exchange rate is flexible the value of the currencies of other countries is freely determined in the currency market in this case the Central Bank never intervenes in any case The currency market through the demand the people who buy the foreign currencies and the supply people who sell is the one that establishes the price of the currencies Therefore it is not fixed and could be modified There is a market when there are buyers and sellers in this case it is the foreign currency and its price is called the exchange rate https www youtube com watch v Vjeosr9VvBk Finally the exchange rate administered is a mix between Fixed and Flexible in this case the value of foreign currencies of other countries is established by the central bank and the foreign exchange market The central bank sets a maximum and minimum price for the foreign currency and the price of the currencies may change if the demand or offer is modified Discussion of when the intervention is needed that is fixed exchange rate systems

The intervention in the foreign exchange market is a performance by the Central Bank of a country on a currency to control its exchange rate with respect to other currencies in order to avoid too large a devaluation of that currency and therefore generate distrust general about the economic situation of that country or economic zone There are other arguments to control the exchange rate such as the control of inflation interest rates and the cost of financing as well as favoring export activity and the trade balance All these interventions are part of the monetary policy of a country or economic zone and have the main purpose of guaranteeing confidence in the investor given that markets move by expectations One of the major interventions of the last few years has been carried out by Switzerland through the intervention of its Central Bank since 2011 This is done by balancing supply and demand by buying and selling foreign currencies and maintaining the exchange rate in a strip located at the level in order to control their macroeconomic aggregates

The Central Bank knew the maximum historical amount of supply and demand of its exchange rate against the euro and could play with this variable to operate in the market maintaining the balance between supply and demand given that it knew the total volume of supply that There were in the market since filters were made of the positions of the investors and they were covered in case they were too large so that there was not a significant imbalance in the exchange rate for this the Central Bank of Switzerland had large Money reserves in your currency exchange in these two currencies Therefore the Central Bank and the

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