The international monetary
system provides a medium of
exchange for international
transactions.
An exchange rate regime is a
policy rule for intervening (or
not) in the forex market.
A monetary union of different
countries is a commitment to
permanently fixed exchange
rates.
An adjustable peg is a fixed
exchange rate, the value of
which may occasionally be
changed.
Fixed exchange rates, perfect
capital mobility, and monetary
soveriegnty are the impossible
triad. All three cannot co-exist
at the same time.
The purchasing power parity
path of the nominal exchange
rate is the path that keeps the
real exchange rate constant.
Nominal exchange rates offset
inflation differentials between
countries.
In a managed float, central
banks intervene in the forex
market to try to smooth out
exchange rate fluctuations
A speculative attack is a large
capital outflow. If successful, it
causes a devaluation. Attacks
are sometimes resisted, by
raising interest rates and
tightening fiscal policy. This
works only if it can credibly be
sustained.
Capital controls prohibit,
restrict or tax the flow of private
capital across currencies.
A currency board is a
constitutional commitment to
peg the exchange rate by giving
up monetary independence.
Policy co-ordination is a
concerted attempt by some
countries to formulate policy
collectively.
The EMS was a system of
monetary and exchange rate
co-operation in Western
Europe.
In the ERM, each country fixed
a nominal exchange rate
against each other ERM
participant. Collectively the
group floated against the rest of
the world.
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