Cool, thats good stuff to know!

I didn’t realise that banks allowed small businesses to hedge against exchange rate risk. Thats a good thing then.

Just to make sure, my post was pro-floating like your comment Dismal. I was just trying to be as positive about fixed as I could so I could make a clear argument about some of the fundamental problems 🙂

So let’s ignore the fact that Eastern European countries sit on the doorstep of the EU. Same with currency boards in South America having the US next door.

The currency board arrangement in HK means that its monetary policy is run by the US.

There are always pluses and minuses for any type of regulatory framework. But just because one plus exists does not mean it is the best, nor does the existence of a minus mean that it is the worst.

Put aside for a moment the question of sustainability and credibility. The conventional view of the fixed vs. floating debate is that floating means that more of the adjustment that follows from a shock is done by the exchange rate whereas with a fixed exchange rate more of the adjustment is done via the real economy. Indeed, those who are concerned about the plight of the lower income groups should reflect on who would be worse off if there are significant fluctations in output and employment.

Finally back the sustainability/credibility issue. We live in a world of highly mobile capital. Unless we go the route of autarky and severe capital restrictions, we must recognise that any attempt to control our exchange rate will have limited effect unless it is credible. A managed float? The RBNZ’s last foray into this area has clearly shown that the effect is temporary when market consensus is against it. Although our economy is considerably more flexible than it was 24 years ago, a little reading of our economic history should show advocates of a fixed exchange rate that a stubborn resistance against international capital flows would rapidly bankrupt our country. Of course, that was a period when the pressure was for a depreciation in the NZ dollar. And while the RBNZ can easily “print money” to fund intervention on the top side (selling NZ dollars to cap its appreciation) it must sterilise this by issuing debt to take money out of the domestic system. Bang goes debt management.

Arguably the most successful “fixed” exchange rate is the Chinese Yuan. Yet even there there are signficant capital impediments. The implication is that if you want to control the exchange rate, you must also control (or at least tightly limit) capital flows. All well and good if you are willing to turn your back on the international markets and pay only lip service to economic freedom.

By the way Matt, I’m afraid the business opportunity has already been taken by things called banks!

Steve – it is only clear cut when you want all arguments pointing in one direction. Economics (and especially financial market economics) would not exist if things were like that. Sure the arguments are not etirely in favour of a floating exchange rate but on balance they point more to a floating than a fixed regime.

if we’re serious about this, just adopt the aussie dollar, or go the whole hog to the USD or Reminbi.

But having the govt bet against George Soros? Priceless!

Sounds hot – I’d be incredibly out of my depth though and everyone involved would probably go bankrupt 😉

Agreed. However, you could make a case for a fixed exchange rate giving a benefit in this case for a place like New Zealand, where financial markets are relatively thin, and large numbers of exporters are small firms which may struggle to set up long term contracts with their clients.