Currency Intervention Research Paper

MONEY SUPPLY, FOREIGN EXCHANGE AND INTEREST RATES

Written Assignment

Unit 6

Principal of Finance 1

Student

Professor: Joel Almanzar

University of the People

Abstract

This paper will discuss why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve. Also how the central banks intervene in foreign exchange markets and what did Bretton Woods Agreement do to the ability of foreign exchange rates to fluctuate freely.

Growth in money supply is not easy to control. Let’s say the Federal Reserve missed the M1 growth rate target two years in a row when the reserve targeting was used. And not only had that but the volatility in the money supply growth rate grown as well. So the

When a country´s currency goes either up or down (increase or decrease) because of financial pressure (which can be caused by unpredictability from trading), and when this happens, is time for the central bank to step in to stabilize the situation and prevent it from becoming a crisis. This intervention can cause a currency value to increase or decrease; this is something that affects imports and exports. When the exchange rates are affected because of intervention and causes a currency to become stronger, this promotes imports over exports and vice versa. For example, if the central bank believes that current interest rates should be raised slowly during the next several months in order to slow the growth of the economy and prevent a resurgence of inflation, then a FOREX intervention to lower the value of the domestic currency would result in increases in the money supply and a decrease in interest rates, precisely the opposite of what the central bank wants to

Under this agreement, currencies were pegged to the price of gold, and the U.S. dollar was seen as a reserve currency linked to the price of gold. This agreement also made currencies convertible for trade and other current account transaction. The main goal was to ensure a foreign exchange rate system, prevent competitive devaluations and promote economic growth. One of the major creations that came from the Bretton Woods Agreement was the International Monetary Fund (IMF). The IMF was created to monitor exchange rates and lend reserve currencies to nations. Another thing that came from the agreement was the World Bank Group, which was created to financially assist countries during the reconstruction port WW1. President Richard Nixon called for a temporary suspension of the dollar´s convertibility. Countries were then free to choose any exchange agreement, except the price of gold. From 1968 to 1973 the agreement was