Assignment Help, Cloud Based ERP System, Microsoft NAV Certification
WELCOME !!

Please Register, ask for assignment solutions & post the solutions if you know any.

LETS START POSTING YOUR IDEAS AND THOUGHTS AND BUILD THE COMMUNITY OF EXPERTS.

Assignment Help, Cloud Based ERP System, Microsoft NAV Certification

Stock Market, Online Tutoring, Cloud Based ERP System, Microsoft Dynamics Reporting, Microsoft Nav Certification


You are not connected. Please login or register

View previous topic View next topic Go down  Message [Page 1 of 1]

1 Currency Substitution Model on 30th September 2013, 2:00 pm

Formatted

avatar
Administrator
By currency substitution it is meant the holding of a foreign currency at the expense of the domestic currency. Individuals usually adopt these measures as a protection against expected depreciation of the domestic currency or to take advantage of an increasing value of the foreign currency.
This theoretical model of exchange rate determination has assumed growing importance in recent years. Currency substitution, it has been argued, is a critical factor in the volatile behavior of exchange rates. It also has radical implications on monetary policy, although the model shows more convincing results when applied in underdeveloped countries where the impact of smart money rushing in and out has a deeper effect on the domestic economy.
Analysts following this model are looking for shifts in expectations of a nation's money supply as these can have an impact on the exchange rates - the same premise as in the monetary model. In anticipation of the reaction, investors position themselves accordingly in the market, triggering the self-fulfilling prophecy of the monetary model.
Following the monetary model, if a country increases money supply it is expected that inflation rises (there is more money to purchase the same goods). The investor following the currency substitution model would take advantage of the cause-effect described in the monetary model and sell the currency which is expected to lose value. This is the basic assumption of the model which theoretically brings prices towards parity.
This model tries to anticipate changes in the money supply and consequently gives more emphasis on interventions in the foreign exchange market. One of its limitation, though, is that domestic inflation depends not only on domestic but also on foreign financial policy because of the linkages between countries. Even in the long run, flexible exchange rates do not permit monetary interdependence.
As with the previous mentioned models, this one also fails to comprehend the whole picture as it is difficult to take in consideration all the factors affecting the relative value of currencies. For instance, a country with a strong current account surplus (resulting from a strong balance of trade surplus) has demonstrated that despite increasing its money supply (to buy stocks and bonds in the market place, for instance), it is unable to make its currency lose value. The money flowing into the country to pay for exported goods and services compensates the amount of new money injected into the economy.


_________________
REGISTER AND LOG-IN TO PARTICIPATE
START POSTING YOUR IDEAS AND THOUGHTS AND BUILD THE COMMUNITY OF EXPERTS.
View user profile http://kantipur.friendhood.net

View previous topic View next topic Back to top  Message [Page 1 of 1]

Permissions in this forum:
You cannot reply to topics in this forum