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This chapter highlights the interrelations between countries through trade and finance, and illustrates some of the policy consequences. It presents a short history of exchange rate regimes, illustrates international vehicle currencies, and discusses capital and investment flows. Since the exchange rate is a price, a rise in the exchange rate indicates that the item being traded has become more expensive, just like any other price rise indicates. There are two types of interest rate parity conditions: covered and uncovered. The chapter explains how the choices have changed over time by focusing on the most recent main international monetary regimes. It overviews these regimes, their duration, and the main characteristics: gold standard, world wars and recession, Bretton Woods, floating rates. Almost all countries at some time or another engage in some type of foreign exchange market intervention, through their legal framework, direct intervention, or interest rate policy. The International Monetary Fund identifies ten exchange rate regimes. |
