Exercise 1 In relation to exchange rate regimes, answer what the following items request:

a. List at least five distinct exchange rate regimes, in progressive order, beginning with a totally flexible regime and ending with a totally fixed regime. List the main characteristics of these regimes, providing examples of countries that adopted them. What are the main economic characteristics of these countries?

b. Research at least three countries that have changed its exchange rate regime over the last 20 years. What was the economic conjuncture of these countries when the new exchange rate regime was adopted? Compare their economic performance 10 years before and 10 years after the change. What are the main differences you can highlight?

c. Assuming that the equilibrium relation in the money market is given by Mt Pt 5 Yη

t i

λ

t

, and using the relation of purchasing power parity and uncovered interest rate parity, find a mathematical relationship that establishes the relation between the nominal money supply and the nominal exchange rate. Consider that the level of prices and international interest rates are fixed. Use this equation to explain how the adoption of a fixed exchange rate regime affects monetary policy. (Tip: Log-linearize the referred equations.)

d. Suppose you are the president of a central bank in an economy that has decided to fix the domestic exchange rate. Using the equation obtained in the previous item, explain how the adoption of a fixed exchange rate regime affects monetary policy. How should the monetary policy be adjusted in response to changes in prices and the domestic output? How should the monetary policy be adjusted in response to changes in prices and international interest?

e. Suppose that, similarly the Eurozone, the countries that compose Mercosur decide to form a monetary union. Using the economic arguments seen in this chapter, present the pros and cons of a decision of this nature.