1.2. Courses of currencies, theories of rates of exchange

The rate of exchange is the "cost" of monetary item of one country, shown in foreign monetary items or international currency units. The Zovnishnovalyotniy course is for the participants of exchange the coefficient of count of one currency in other, that is determined by correlation of demand and supply at the currency market. Two groups of factors influence on a currency exchange rate:

1. structural character (the state of economy of the given country is represented) - indexes of the economy growing, volume of amount of money in circulation, level of inflation, level of registration rate, state and structure of balance of payments of country, volumes of deficit of the state budget, solvency of country and trust to national currency at the internal and external market, volumes of internal and external loans and others like that;

2. conjuncture (constantly change under act of tendencies of internal and world markets) - speculative currency operations, forming of inflationary expectations, change of governments, developed of other sectors of financial market and others like that.

The rate of exchange, that in most countries is set by central banks, executes such functions:

• assistance to internationalization of money relations;

• assistance to the union and development of financial markets;

• comparison of levels and pattern of prices, results of production activity in different countries;

• comparison of national and international cost at the national and world market;

• redistribution of national product between separate countries and others like that.

In international practice such modes of rates of exchange are used:

1. the fixed rate of exchange. that foresees the presence of definite official parity which are supported by the organs of state currency control.

A national currency exchange rate can be fixed:

• in relation to one currency (more frequent all against an US dollar, in the countries of Africa to euro);

• in relation to the basket of currencies (SDR).

Limitation of vibrations of courses of currencies can be carried out concerning:

• one currency (countries of the Persian bay);

• groups of currencies (countries of the European currency system).

2. floating rate of exchange, which changes depending on market demand and supply of currency at the market, that, in the turn, relies on the state of balance of payments of country, interest rates, inflation rates, currency interventions and others like that. On condition of introduction of limitations this mode is named the guided swimming, he is used by most world countries. Distinguish:

• swimming according to a definite index (when a course depending on the change of economic indicators changes automatically);

• the guided swimming (when the Central banks constantly change the rate of exchange depending on the state of balance of payments, level of inflation, currency backlogs). A similar guided swimming is carried out without hard dependence and automatism, as during application of indexes. Such mode is used in 20 countries, among which Poland, China, Egypt, Turkey, Israel;

• independent swimming (a course is determined by demand on currency without intervention from the state). The free swimming can be afforded only economic by the developed countries, in particular, the USA, Canada, Japan, Australia, countries of ES (tabl. 3).

Table With

Description of the basic modes of rates of exchange

Mode of rate of exchange	Description	Notes
1	2	3
Freely floating	Complete freedom for market forces	In a theory is possible, and in practice conducted rarely. Central banks try to conduct interventions
The guided floating	A central bank conducts interventions, but only with the purpose of support of equilibrium	It is used often. Problem - a central bank can know not, whether the change of course is short-term oscillation, or long-term tendency
"Creeping attachment"	A central bank conducts interventions for achievement of certain goals in the field of the controlled oscillation of courses	It is used often, but given a positive result only when market development answers the prognoses of bank in relation to the dynamics of rate of exchange
The fixed course within bounds of currency corridor	Possible vibrations in possible scopes. A central bank conducts interventions, that not to give to the course to go out for the set limits	It was used in the European currency system (oscillation 2,5 %-15 %). If a course approaches a border, before a central bank the same problems get up, that and at the system of the fixed courses
The fixed course with possible rejections	It is fixed on a long term taking into account possibility of insignificant rejections, but can considerably change, if an equilibrium is violated or felt strong influencing of market	Characteristic for the Bretton-Voudscoi system (possible vibrations - 1% from the set parity to the dollar). It was widely used in 1945-1972rr. If a course in good time is not corrected, for conducting of intervention this mode can be too dear.
The course fixed by a central bank	More hard comparatively with the fixed course with possible rejections	Fixing is a purpose for indefinite term, and a course can change without; previous stipulating. Today is not practically used (it was used to 1979р. English and", irish by pounds)

Continuation of table 3

1	2	3
The course fixed by currency advice, or gold standard	The amount of money must be fully covered by foreign currency or gold after the fixed course	Hard discipline provides convertibility after the fixed course, that through arbitration approaches the market value of course. Can affect an economy, production, prices, that can stipulate political pressure for the waiver of the mode
Sole currency	Waiver of national independence, introduction of a new sole currency for the group of countries	on January, 3 1 1999р. - sole evropeysca-valyota - euro. A policy foresees acceptance of common decisions in the field of the groshovo-creditnogo adjusting

Carrying out the guided swimming, the central banks of some countries (in particular, Sweden, Brazil, I Wear away, Colombia, Poland) set the rates of exchange on the basis of row of indexes - through comparison of standard of oversea prices it is comparative with internal prices in the country, taking into account the level of currency backlogs and state of balance of payments. Then the use of parity of purchasing power (RRR), which is correlation of currencies depending on the level of their purchasing power, is the basis of determination of rate of exchange. Depending on the manifest of goods RRR can be partial (after the definite set of commodities) or general (after a gross national product).

Determination RRR on the basis of comparison of standard standard of prices of goods and services is the most simple method:

,

where R(А) and R(В) - standards of prices of set of goods and services in the proper countries But also In in a definite period.

Next to a price RRR there is a method which is based on correlation of charges of production. Such method enables to a certain extent to decrease influencing of price vibrations. He –rountouetsya on determination of correlations of effective production charges which the wages (W) and index of labour productivity zarahovouyot to (PR). After such method, RRR has a kind:

The theories of rate of exchange execute two functions: first (ideological) directed on ob–rountouvannya viability of market economy; friend (practical) consists in development of methods of adjusting of rate of exchange as component part of currency policy.

There are such theories of currencies:

1. The theory of parity of purchasing power is based on nominalistichniy and quantitative theories of money and takes beginning from the looks of English economists D. Yoma and D. Ricardo. The basic idea of this theory consists in that the rate of exchange is determined by correlation between the standards of prices of two countries, and the standard of prices relies on the quantity of money in circulation. This theory is directed on the search of "course of equilibrium", which would support the equilibrium of balance of payments. The theory of parity of purchasing power denies the cost basis of rate of exchange, exaggerates the value of elemental market factors and underestimates the state methods of adjusting of course correlations and balance of payments. This theory became component part of monetarism, the admirers of which exaggerate the value of changes of amount of money in development of economy and inflation, and also market adjusting.

2. The theory of the managed currency arose up under act of world economic crisis 1929-1933rr. on the base of conception of Ceynsa. This theory was presented by two directions. The first direction is the theory of mobile parities - developed I.Fisherom and Dg.М. By ceynsom. Fisher suggested to stabilize purchasing power of money by manoeuvring by the gold parity of monetary item. Ceyns recommended to lower a national currency exchange rate with the purpose of influence on prices, export, production and employment in a country, for the fight for external markets.

The second direction is the theory of courses of equilibrium, or neutral courses - substitutes for the parity of purchasing power to notions of "equilibrium of course". The rate of exchange is considered neutral, that answers the state of equilibrium of national economy.

3. The theory of key currencies was created by American economists Dg. Vilyamsom and A.Hansenom after Second world war under act of strengthening of positions of the USA in international production and trade. Essence of the given theory consists in aspiration to lead to:

1. necessity and inevitability of division of currencies on key (dollar and pound), tverdi (currencies of countries of the "ten"), and soft, or exotic "things", currencies, that do not act active part in international economic relations;

2. value of dollar as a leader in a counterbalance gold;

3. necessity of orientation of policy of entire countries on a dollar and support of him as key currency even on harm to their national interests.

This theory underlay the Bretton-Voudscoi system, the crisis of which led to the groundlessness of assertions about exceptional nature of dollar comparatively with other currencies.

3. Theory of the fixed parities and courses. The admirers of this theory (Dg. Robinson, F. Grehem and in.) recommended the mode of the fixed parities, assuming their change only at fundamental nerivnovazi balance of payments. Leaning on an economico-matematichni model, they came to conclusion, that the change of rate of exchange is the uneffective mean of adjusting of balance of payments in connection with the insufficient reaction of foreign trade on the price-wave on markets world depending on course correlations.

4. Theory of floating rates of exchange. Representatives of this theory - mainly economists of monetaristscogo (neoclassical) direction (M.Fridmen, G.Dgonson, G. Girsh and in.). In their opinion, the rate of exchange must freely hesitate under act of market demand and supply, and the state must not to regulate him. The idea of refusal of the state from adjusting of currency relations is utopian. The "dirty swimming" of courses of currencies, based on combination of the market and state adjusting, prevails in practice.

5. Normative theory of rate of exchange. This theory considers the rate of exchange as additional instrument of adjusting of economy, recommending the mode of the flexible course controlled by the state. A theory is named normative, as its authors (Dg. Mid, R.Mandell) consider that the rate of exchange must be based on parities and agreements set by international bodies.

Most ideas of theories are not realized: it was not succeeded to attain the automatic balancing of balances of payments, effective defence from the spontaneous movement of "hot money", stopping of international distribution of inflation. The results of embodiment of recommendations of theorists only answer partly, and sometimes and conflict with their forecast purposes. Theorists and practical workers are disturbed by absence of developments of fundamental theoretical decisions of stabilization of economy, in particular currency relations.

Basic conformities to the law of dynamics of rates of exchange are:

1. Comparison of policy of the fixed and flexible rates of exchange Leads to, that neither of them takes advantages in relation to the necessity of providing of employment and stable prices. Flexible courses, as a rule, unsteady in a short-term plan, but in long-term economic processes are really represented. The fixed courses prevail after short-term stability, but very inelastic in a long-term plan. Therefore most countries use the guided swimming.

2. A national currency exchange rate relies on three basic factors:

• correlation of standards of internal and external prices. Other things being equal the internal price increase results in reduction of prices of national currency, that is rise of its course in relation to other;

• character and intensity of auction streams. Reduction of volumes of export markets conduces to abbreviation of export, increase of deficit of balance of payments and depreciation of national currency, that, in the turn, at the competitiveness of commodities on markets world creates terms for the increase of volumes of export, abbreviation of deficit of balance and rising in price of national currency;

• intensities of peretocou of capitals. The rise of interest rates at the internal market is instrumental in bringing of foreign capital and rising in price of national currency in.

3. Subject to the condition relative stability of internal and external costs of oscillation of national currency exchange rate the change of competitiveness of commodities is represented. The understated rate of exchange comparatively with his real purchasing power results in a volume, that prices up a country become from worlds below. Exporters at the same world prices get more of national currency, than earlier and commodities are in a position more advantageous to sell.

The overpriced rate of exchange does internal prices higher and less concourentnospromognimi. Efficiency of export falls, he becomes unprofitable. By the turn, the import broadens and grows short national production, an external debt is multiplied.

4. The presence of negative balance of balance of payments testifies that demand on foreign currency exceeds its suggestion, and it, in it the turn, causes depreciation of national currency. Positive balance of balance of payments, opposite, characterizes the rise of suggestion of foreign currency and is instrumental in rising in price of national.

5. Pereticannya of capitals from a country in a country relies on the level of interest rates and expected changes of rates of exchange. Countries with top rates and stable monetary items are more attractive for a foreign capital. Investors are deprived currencies, which can devalue, and translate capitals in currencies of countries, where a hard monetary policy is pursued and there are high interest rates.

6. In the case of sharp abbreviation of currency backlogs of country a national bank is forced to conduct devaluation of national currency, that will be instrumental in the increase of export. That to neutralize the negative consequences of devaluation, it is necessary to stabilize internal prices. Differently the internal price increase levels winning from growth of competitiveness of commodities on markets world.

At understating of national currency exchange rate possible currency dumping. The decline of currency exchange rate in greater sizes is the basis of him, than the real falling of its purchasing power at the internal market. Then an exporter buys a commodity at the internal market at a relatively low price, then sells commodities abroad for hard currency, trucks hard currency for the greater quantity of the depreciated national currency and gets course nadpriboutoc. In countries, where the currency dumping is used, the real wage and standard of life of population goes down.

In 1967р. during making Agreement about tariffs and trade an international anti-dumping code which foresaw application of express authorizations against dumping was accepted. It is foreseen in regulation of the International monetary fund, that participating countries must not use the change of national currency exchange rates for achievement of competitive edges. However a similar warning are constantly violated economic by prepotent countries, that use the change of courses in competitive activity. By means dumping possibility of expansion of markets of sale and production volumes is created. But simultaneously considerably the import of commodities rises in price and is observed import of inflation, which appears, in connection with that credit establishments deposit greater part of invalyoti in central banks, getting vzamin national currency. The surplus amount of money acts in passive voices of credit establishments, that allows to extend the borrowed operations, the quantity of money in circulation grows as a result, consequently, inflation grows. The imported prices grow that affects the costs of national economy.