There is now a free forward exchange market.26 Authorized foreign exchange dealers (banks and nonbank financial institutions) are permitted to negotiate forward exchange contracts in any currency. They may deal among themselves and with their customers, including both residents and nonresidents, at mutually negotiated rates. The Reserve Bank sets a limit for each dealer’s overall overnight foreign exchange exposure. However, in aggregate, dealers rarely use more than 25 percent of their approved limit.
The paper presents evidence from the past three years which indicates that the exchange rate between the private ECU and the official ECU Basket can deviate substantially from par. The value of the private ECU is driven by expectations that a future European Central Bank will enforce par convertibility between the private ECU and the official ECU basket of currencies. Meanwhile, no existing institutional arrangement limits the private ECU’s value in terms of the Basket. This paper addresses the question of what determines the values of the private ECU and of private ECU interest rates. We show that an anticipation of a future fixing of the private ECU’s value, together with the interest rate setting mechanism of the large-value ECU payment and clearing system, are sufficient to determine its value. The determination of the private ECU exchange rate provides the template for how to determine the value of any private composite currency, such as, for example, a private SDR.
This paper elaborates the introduction of surveillance that gave the IMF broader responsibilities with respect to oversight of its members’ policies than existed under the par value system. The IMF’s purview has been broadened under the new system but, by the same token, its members are no longer obliged to seek its concurrence in changes in exchange rates. The continuing volatility of exchange rates, and their prolonged divergence from levels that appear to be sustainable over time, have been matters of growing concern.
Systems for forward cover against exchange rate risk exist either in the official or the commercial sectors in most member countries of the International Monetary Fund. However, the form of the arrangements varies widely from one country to another, and has consequences for economic efficiency and macroeconomic management. Essentially, there are three types of forward exchange systems: market determined, with the possibility of official intervention; “market approximating,” in which the authorities attempt to set forward rates that simulate free market conditions; and official cover and exchange rate guarantees at fixed nonmarket rates. In practice, the last two forms of arrangement have frequently given rise to government subsidies, with serious consequences in a number of instances for central bank profits, and hence, fiscal budgets and rates of monetary expansion.
There has always been a desire to avoid the risk associated with trade and economic activity across currency boundaries. An early form of exchange risk hedging in industrial countries was the use of long bills that constituted an asset or liability in foreign currencies—a practice dating back several centuries. With the improvements in financial techniques in the latter half of the nineteenth century in Europe, genuine forward exchange markets—markets in which currencies were traded for future delivery—emerged. Since that time, official or unofficial forward exchange trading has taken place whenever exchange rates fluctuated or were subject to significant uncertainty, provided that the authorities did not directly suppress the markets.
There is a small but growing number of forward exchange markets in developing countries in which forward cover is provided to the private sector under competitive conditions by commercial banks.15 In some cases, these markets have been introduced in association with floating spot exchange systems and are at an early stage of development (as they are in Jamaica, Nigeria, the Philippines, and Zaire). In other cases, forward markets have arisen in association with relatively advanced financial systems or relatively free exchange systems, or both (as in Brazil, Chile, Indonesia, Jordan, Korea, Malaysia, Singapore, Thailand, and the United Arab Emirates).
This Selected Issues paper examines a number of potential factors that may have influenced the short-term behavior of the exchange rate between the Chilean peso and the U.S. dollar during the period of floating exchange rate, including the possible impact of developments in Argentina during 2001. The paper investigates whether copper prices can be successfully forecasted over medium-term horizons, emphasizing the properties of copper prices most relevant in the Chilean context, including for fiscal policymaking. The paper also provides a snapshot of the Chilean banking and corporate sectors.
International Monetary Fund. Western Hemisphere Dept.
This paper assesses the importance of financial market developments for the business cycle in Brazil. The results underscore the importance of macro-financial linkages and highlight risks to the recovery going forward. Although some of the rise in credit growth in Brazil can be attributed to financial deepening and rising income levels, it may have implications for economic activity going forward. Cross-country evidence suggests that periods of easy financial conditions can amplify economic fluctuations and possibly lead to adverse economic outcomes. To explore the nexus between the financial cycle and business cycle, cycles are estimated using a variety of commonly-used statistical methods and with a small, semi-structural model of the Brazilian economy. An advantage of using the model-based approach is that financial and business cycles can be jointly estimated, allowing information from all key economic relationships to be used in a consistent way. Financial sector developments are found to be an important source of macroeconomic fluctuations. Financial accelerator models highlight the role of credit and asset prices in shaping the business cycle.
This paper presents international evidence on the determinants of trade dynamics. It provides some new empirical perspectives on the relationship between international trade and macroeconomic fluctuations in industrial economies. A comprehensive set of stylized facts concerning fluctuations in trade variables and their determinants is presented. A measure of the quantitative importance of international trade for the propagation of domestic business cycles is then constructed, focusing on the role of external trade as a catalyst for cyclical recoveries.
This paper answers key questions in considering a value-added tax (VAT) for Central and Eastern European countries. The paper emphasizes that in Western countries tax policy derives from the assumption that the market achieves an optimal allocation of resources. Efficiency in resource allocation and, by extension, the neutrality advantages of the VAT cannot be attained if prices continue to be controlled by the government and enterprises continue to be subject to undue regulation and direction from the center. If a VAT is not to resemble the kind of bookkeeping exercise of the old turnover taxes, then its introduction should be preceded by a substantial degree of price liberalization and enterprise autonomy. Finally, a VAT is a “democratic tax,” in the sense that, in the main, taxpayers must comply voluntarily with the obligations imposed on them. Also, they have the right to disagree with the tax liability as ascertained by the tax office. This requires carefully crafted procedures and sustained efforts to elicit taxpayer cooperation.