In economic systems, one of the most important aspects is exchange controls , which imply a series of limitations imposed by the government regarding the purchase and / or sale of foreign currency . These controls allow countries to maintain better stability in their economies by limiting the inflows and outflows of foreign currency , which can create volatility in exchange rates and one of the most widely used controls is exchange rate policies , actions that are more aimed at relationship that exists with changes in the value of the currency .
What is exchange rate policy?
The exchange rate policy is a set of instruments , of measures and decisions that are taken and implemented by the central bank and the government with the main objective of regulating the value that changing the national currency related to other currencies .
- Exchange policy characteristics
- Exchange policy types
- Effects edit
- Examples of exchange policy
Exchange policy characteristics
Among the main characteristics that are part of the exchange policy we find the following:
- Exchange policy reflects the demand and supply of currencies .
- It manages to improve the external credit of the countries.
- It makes it possible for nations to have more options for financing with better and lower interest rates .
- It can arise from inflation rates that are presented internally.
- For it to work and to stabilize the currency or the way in which a currency behaves, it is necessary that changes also be made in the monetary , economic , fiscal and labor fields .
One of the main objectives of exchange policy is to influence the value of the national currency , the decisions made in them try to exercise control over the value of the currency related to foreign currencies . In addition, it tries to provide stability to the monetary value either by devaluing the currency or by printing currency. It is a mechanism by which it seeks to control inflation and achieve an external equilibrium right next to an exchange rate that is optimal, finally, it tries to increase thecompetitiveness that exists in exports.
Exchange policy types
There are three types of foreign exchange policies which are:
- Fixed : this type of exchange policy is based on the fact that the value of a currency is subject to other reference values .
- Flexible : the value of the currency can be adjusted by means of the market value . The intervention of the State can not make this an important or does but to a lesser extent .
- Band : here should be taken as reference the two currencies , thus, at the time that the value of one of them reduces or decreases the value of the other increases , and then, the exchange rate is increased .
Some examples of instruments that can be used to regulate and establish monetary policy are:
- Open market operations : in this type of operation, a certain amount of liquidity is injected within a certain period so that later the entities must deliver, during a set period, the financial asset as a type of guarantee.
- Limited liquidity injection operations : in this case, operations related to the open market, an amount is awarded based on the total liquidity needs of the banking sector and the cost of the variables will demand liquidity.
- Expansion of the list of assets : these assets must be financially accepted as a type of guarantee in liquidity injection auctions.
- Purchase of securities : this type of purchase occurs mainly in the purchase of public or private debt bonds through trading markets.
Exchange rate policy can produce a series of changes in prices with goods and services, especially those that are imported which produces the same time , a direct effect on the index of prices for consumption. Prices related to commodities also start trading in dollars so this also has an effect on commodity prices.
Changes in the growth of exports is present as changes in currency values make it becomes more complicated to sell in overseas as prices are relative. Because the exchange rate causes lower growth with respect to GDP , because exports fall and demand for imports increases .
When this happens, the decline in demand and production can generate that lost many jobs because companies start trying to control costs. Some of these losses may be temporary as they are short-term. Some others can also be permanent so it can have negative effects on the economy of a country.
Exchange policies are important because they are the ones that have the ability to maintain the internal stability of the national currency as well as external stability . It is a medium that, if done adequately and intelligent, can significantly promote the development of the economy of a region.
Examples of exchange policy
Some examples of foreign exchange policies that have been applied around the world are mentioned below.
- European Union : here the exchange policy is in the hands of the European Central Bank which is administered regionally and for this reason, the countries that are part of it do not have the ability to modify the economy because they do not have a currency of their own .
- Colombia : is in charge of the Banco de la República, which is looking for a way to keep the inflation rate lower and at the same time stable. Its exchange policies also try to contribute to maintaining financial stability as well as payment systems. In Colombia, it works as an adjustment variable to face the shocks that the economy receives and they use interest rates as an instrument to improve the desired values.
- Mexico : the exchange policy in the country is in charge of thecountry’s Foreign Exchange Commission, which is made up of officials from the Ministry of Finance and Public Credit . The resolutions that are taken on their part must be put to a vote and are only approved when they obtain the majority of the votes.
- Peru : exchange rate policy is regulated by the Central Bank and is a unique system as it is responsible for buying and saving dollars when the exchange rate goes down and sells them when the exchange rate rises. This is done in order to simulate the possible effects that a significant drop in the international price of the export material would cause, as well as the study of the different options related to macroeconomic policy that are available.
- China : in this country a fixed rate exchange policy is implemented, in other words, every day it sets the price of its currency without taking into account what is offered or demanded in terms of currencies. It is in charge of the Chinese Central Bank, which is then in charge of establishing an expansionary monetary policy .
- Costa Rica: in the country, exchange policy is in the hands of the Central Bank of Costa Rica , which is in charge of maintaining both the internal and external stability of the currency in order to ensure proper conversion to other types of currencies. The exchange rate used by the country is floating, so the bank does not intervene directly in the foreign exchange market, allowing supply and demand to determine the exchange rate.
- United States : here, the exchange policy is in charge of the Central Bank which is made up of a total of twelve banks which are known as the Federal Reserve System . Its main function will be to guide the monetary policy of the country to regulate the country’s economy by establishing a series of controls for the supply of money that is in circulation.