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Currency Board

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Global Economic Environment of the Firm
Macro Economics
Monetary Policy and Exchange Rate Regimes
The questions should be answered using Macro Economic arguments using graduate level thinking. Please pay attention to the questions asked. More detail, the better.

Questions: The article argues that, ``the rigidity of the currency board made it difficult to respond to these shocks." You should think of the currency board simply as a fixed exchange rate regime.
(i) What are the restrictions that the currency board imposes on economic policy, which makes it difficult to respond to external shocks?
(ii) If Argentina was not on a currency board what could it have done to respond to the external shocks of rising cost of capital, and the fact that Brazil, Argentina's main trading partner had devalued its currency?

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(i) What are the restrictions that the currency board imposes on economic policy, which makes it difficult to respond to external shocks?
A currency board is a fixed exchange rate regime. By fixing the exchange rate the Central bank gives up its ability to influence the economy through monetary policy.
Suppose the central bank wants to increase the output and give a boost to the economy in the short run by lowering the interest rate. Thus it increases the money supply through a purchase of domestic assets. Under a floating exchange regime this would cause a depreciation of the domestic currency. However in a fixed exchange regime the central bank would not ...

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The solutions answers 2 questions on currency board and external shocks.

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