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    Central Banks and Exchange Rates Regulation

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    You have been tasked to brief the firm's finance team on an aspect of international finance and then to lead a discussion with the team.
    This briefing is particularly important because of the global financial crisis that began in 2007.

    The briefing is needed to provide more foundation for the finance team because they are not well versed in the international aspects of finance.

    * Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.
    * What did the central banks do to stabilize the financial systems in 2007â?"2009?
    * In an effort to stabilize the financial system how much money, in U.S. dollar equivalent and as a percentage of the country's GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009?
    * How well did each country's efforts work at stabilizing the economy?
    * What appears to be the major constraint that the central banks used to determine the limits of the monetary injections into the economy? Did the United States use the same or different criteria?
    * To what extent to do you agree/disagree with the actions of the central banks during this time?

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    Central Banks and Exchange Rates Regulation
    Central banks buy and sell their own currencies in the open market to control the value of their currencies. However, to be able to do this it is implied that the central banks have significant level of reserves of foreign currencies which they use to buy their own currencies back. Dash and Narayanan (2010) opined that "[when] reserves are depleted, the central bank will not be able to intervene again in the foreign exchange market and will have to allow the commercial exchange rate to depreciate" (p. 7). Depreciation of one's currency has economic repercussions which central banks might not be prepared to take, hence the ...

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