Currency Regimes – the cases of Switzerland, Bulgaria and Russia
Lecturer: Dr Nnamdi Obiosa
Group Report written by:
Alexander Karolev, Lysette Bide, Gregory Hands, Ange Myaouenuh, Sebastian Balkenhol
May 4, 2011, London, United Kingdom
Word Count (excl. references and tables): 2887
1. Terms of Reference 3
2. Methodology 3
3. CurrencyRegimes 3
3.1. Introduction 3
3.2. Switzerland 5
3.3. Bulgaria 8
3.4. Russia 11
4. Conclusion 14
5. Bibliography 15
1. Terms of Reference
This report has been prepared by Alexander Karolev, Sebastiaan Balkenhol, Gregory Hands, Lysette Bide and Ange Myaouenuh, final-year students at the European Business School London and it is to be submitted by 15th April, 2011to Mr Nnamdi Obiosa, FIN 355 – Multinational Financial Management Course leader at Regents’ College. This report aims to provide an overview of the different currency regimes and evaluate how they affect the economies of Switzerland (floating), Bulgaria (fixed) and Russia (managed).
The methodology used in compiling this report solely relies on secondary research. The majorsource of information is the Internet as well as various topic-related textbooks, journals and other reading materials. For a full list of references, please refer to the Bibliography page at the end of the report.
3. Currency Regimes
Adopting the most appropriate currency regime is one of the most important economic policy questions that governments face. In the past,countries have encountered economic crisis hindering their economic growth as a result of an inappropriate choice of their currency system. Others were never able to see adequate growth because of misguided decisions. Naturally, the exchange rate policy is not the only factor to be taken into account, but a flawed exchange rate policy will have serious implications on the rest of the economic system(Williamson, 2004).
The different currency regimes can mainly be classified under three types:
• The floating exchange rate regime
• Managed floating rate systems
• Fixed exchange rate systems (also known as pegged exchange rate systems)
Each regime has a sub category - under the pegged exchange rate system there are the crawling bands (the value is set but the rate isallowed to rise or fall within the band), the crawling pegs (usually linked to a fixed exchange rate regime where the currency appreciates or depreciates gradually) and pegged with horizontal bands (Altius, 2000).
In the floating exchange rate regime, the value of the currency is determined by the market. Exchange rate movements are thus influenced by the interactions of thousands of banks,firms and other institutions seeking to buy and sell currencies for purposes of transactions clearing, hedging, arbitrage and speculation (Exchange Rate Systems, 2004). Thus, higher demand of a currency would lead to the appreciation of the currency and lower demand would lead to the depreciation of the currency. On the contrary, an increase in supply would lead to the appreciation of the currencyand a decrease in supply would lead to the appreciation of that particular currency (Exchange Rate Systems, 2004). Most strong currencies in developed countries are operating under the free float regime.
A fixed exchange rate regime is where the central bank declares a fixed exchange rate for the currency and agrees to buy and sell domestic currency at this value. The motivation behind this typeof policy is usually the belief that a fixed exchange rate will facilitate trades and investments between countries by reducing fluctuations in prices and uncertainty (Exchange Rate Systems, 2004). However, one might argue that financial markets have developed derivatives to hedge future exchange rates fluctuations (Exchange Rate Systems, 2004).
A managed floating regime is a mixture of a...