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Revision Notes for Finance of Emerging Markets – University Level Economics
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Exchange rate arrangements what do countries do?
Devaluing affects the commodity chain, e.g. sending off goods to china to get fixed and coming back
Exchange rate regimes
Managed floating system
,Crawling Peg
Re-categorisation of exchange rates
EM fragile to inflation, uses an exchange rate as anchor
Parallel market = black market
,Importance of parallel exchange markets
CB is forced to follow
- dual – in parallel market, trading against one currency e.g. against dollar. Multiple – exchanging many
currencies
- Dual multiple gets larger -> parallel market getting larger -> current monetary arrangements breakdown and
cannot peg anymore
- 1973: oil shock -> inflation in oil prices
, Anchor currency classification: how to find out if country is free floating or managed
the process of anchor currency selection. The distinction between freely and managed floating will be defined
below. If a currency is identified as “freely floating” it is classified as having no anchor or reference currency. At
the other end of the spectrum, countries with arrangements that are less flexible than managed floating have a
low degree of exchange rate variability viz a specific anchor. In these cases. we use this lack of flexibility as a
summary measure and classify the anchor currency accordingly.
Managed floating has emerged as a regime of choice among the larger emerging markets. Managed floating is a
relatively more flexible exchange arrangement and the classification of a currency as managed floating doesn’t
assign a clear anchor: Smallest movements with respect to single anchor more than 50% of time linked to that
anchor. Pp 9-10 ILZETZKI-REINHART-ROGOFF on qmplus
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