Exchange-Rate Regimes and Capital Flows in East Asia.
The exchange rate regime has a big impact on world trade and financial flows. The volume of such transactions and the speed at which they are growing makes the exchange rate regime a central piece of any national economic policy framework.
Due to a fact that balance of payment includes current account and capital account, its influence on exchange rate is complex sometimes reversed, so if a trade deficit which generally led to the depreciation of currency can be covered by the capital inputs in such a way that it generates an appreciation on local currency. Some other factors are.
Regardless of exchange rate regime, and no matter how sophisticated the financial engineering, big capital flows imply many players (either domestic or foreign) are exposed to exchange rate risk. This risk can be shifted to players more capable of withstanding the shocks, but it is much more difficult to remove the incentive they have to reverse their position when a crisis is judged to be.
Many proponents of this exchange rate regime point out the fact that the fixed exchange rates are advantageous when it comes to reducing the transitions costs and the risks associated with exchange rates. Certainly, this would be very beneficial to countries with underdeveloped or still developing financial systems or sectors as economic agents.
Building upon the small open economy framework, I create an environment where the policymaker can decide the level of exchange rate regimes -- instead of a binary choice of exchange rate regime, fixed or floating -- in response to external shocks, where capital controls are introduced as a tax on international capital flows.
Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We find Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy.
The Influence Of The Different Exchange Rate Finance Essay. regimes on a macroeconomic level.. and regime choice of an economy is shaped by the economy’s institutional and financial maturity and its openness to capital flows. There are many different factors that influence these three points, like: the size of the economy, export structure.