The implementation of the economic cycle: freedom, trust, duty

The exchange rate affects the degree of currency on world markets. In particular, the preferential use of the U.S. dollar in international transactions and international capital markets is a constant demand for it and maintains its course even in the fall of its purchasing power or passive balance of payments[30 - Коэн Бенджамин Будущее резервных валют // Финансы & развитие. 2009. С. 26.]. Rising interest rates on deposits and (or) the profitability of securities in any currency will increase the demand for that currency and will lead to higher prices. Relatively high interest rates and yields of securities in the country (in the absence of restrictions on capital flows) will lead in the first place, the influx into this country of foreign capital and thus – to increase the supply of foreign currency, it’s cheaper and more expensive currency. Second, bring a higher return deposit and securities in national currency promote national cash outflow from the currency market, reducing demand for foreign currency, and a decline in the foreign and local currency appreciations.

With an active balance of payments is growing demand for its currency from foreign debtors, its rate can be increased.

Economic importance of the exchange rate determines the need for its regulation.

Along with the market conditions, which include the effect is difficult to supply and demand for currency, is the dynamics of its course, affect, and relatively long-term trends that determine the position of a national currency in the currency of the hierarchy (structural factors).

Structural factors:

– The competitiveness of goods on world markets and its changes. They are caused, ultimately, technological determinants. A forced export stimulates the flow of foreign currency;

– The growth of national income causes an increased demand for foreign products, while imports of goods may increase the outflow of foreign currency;

– A consistent increase in domestic prices compared to prices in the markets of partners increases the desire to buy cheaper foreign goods, while the tendency of foreigners to purchase goods or services that become increasingly expensive, disappears. As a result of reduced supply of foreign currency and depreciation is domestic;

– Other things being equal, higher interest rates is a factor in attracting foreign capital and, consequently, foreign currency, and can also lead to higher prices of domestic. But the rise in interest rates is well known, and the shadow side: it increases the cost of credit and a depressing effect on investment activity in the country;

– The development of securities market (bonds, bills of credit, stocks, etc.) that make up a healthy competition the foreign exchange market. The stock market may attract foreign currency directly, but also attract national funds which would otherwise be used for buying foreign currency[31 - Суэтин А.А. Международный финансовый рынок. – М.: КНОРУС. 2009. – С. 26.].

3.4. The main methods of regulating the exchange rate

The main body of the foreign exchange regulations of the Russian Federation is the Central Bank of Russia. It defines the scope and procedure of appeal to the Russian Federation, foreign currency and securities in foreign currency, sets the rules for the residents and Russia operations with foreign currency and securities in foreign currency, as well as rules for non-residents operations with rubles and securities in rubles; establishes the procedure for compulsory transfer, import and transfer to Russia of foreign currency and securities in foreign currency belonging to residents, as well as events and conditions of opening resident foreign currency accounts with banks outside of Russia, sets out general rules for licensing credit institutions to carry out foreign exchange transactions and issues such licenses, establishes uniform forms of accounting, reporting, documentation and statistics of currency transactions.

The main methods of monetary control are:

– Currency intervention (buying and selling foreign currency to national);

– Central bank operations in the open market (buying and selling of securities);

– Change in central bank interest rates and (or) reserve requirements.

Exchange controls exercised by exchange controls and their agents. Currency control bodies are the Central Bank and the Government of the Russian Federation. Currency control agents are organizations that are in accordance with legislative acts may perform the functions of currency control.

The main directions of monetary control are:

– Determination of compliance of foreign exchange transactions with current legislation and the availability of necessary licenses and permits;

– To verify that the residents of foreign currency liabilities to the state, the validity of payments in foreign currency, completeness and objectivity of accounting and reporting of currency transactions and for transactions with nonresidents in rubles.

The object of national and transnational regulation is currency restrictions and currency convertibility regime.

As rightly pointed out Frederic Bastiat «you cannot give money to some members of the community but by taking it from others»[32 - Bastiat Frederic. The Bastiat collection. Volume I. – Auburn: Ludwig von Mises Institute. 2007. – P. 219. (вы можете давать деньги одним, только отобрав их у других).]. Cash is in fact equivalent to existing facilities, money is their «mirror image», and, therefore, imperative redistribution of opportunity or simply move the cost of changing the terms without affecting the sum.

Foreign exchange restrictions – is introduced in legislation or regulation, restriction of operations with national and foreign currency, gold and other currency values.

Distinguish restrictions of payments and transfers for current transactions balance of payments and financial transactions (is transactions involving the movement of capital and credit), the operations of residents and nonresidents.

The number and type practiced in the country depends on foreign exchange restrictions convertibility regime. Currency convertibility (reversibility) – is the ability to convert (exchange) currency of the country for the currencies of other nations. Distinguish between free or fully convertible (reversible) exchange, partially convertible and nonconvertible (irreversible).

Fully convertible («freely usable» in the terminology of the IMF) are the currencies of the countries in which virtually no foreign exchange restrictions on all types of operations to all holders of currencies (residents and nonresidents). In partial convertibility of the country remain restrictions on certain types of operations and / or to individual holders of the currency. If the limited possibilities for conversion of non-residents, the convertible is called outer if non-residents – domestic. What matters most is convertibility on current account of balance of payments, it is possible without restrictions to the import and export goods. Most industrialized countries have switched to this type of partial convertibility of the mid-60s of the twentieth century.

Currency is not convertible, if the country has almost all kinds of restrictions and, above all, a ban on the purchase – sale of foreign currency, its storage, export and import. Inconvertible currency is typical of many developing countries.

3.5. Exchange rate regime

Exchange rate regime characterizes the order setting exchange ratios between currencies[33 - Джеффри А. Фрэнкел Что актуально и неактуально в мире международных денег // Финансы & развитие. 2009. С. 13.].

Distinguish between fixed and «floating» exchange rates and options, which combine in various combinations of the individual elements of a fixed and «floating» rate. Such a classification of exchange rate regimes generally conformed to the IMF currency division into three groups:

– Currency-bound (to a single currency, «currency basket» or the international monetary unit);

– Currencies with great flexibility;

– Currencies with limited flexibility.

Fixed exchange rate regime

Under the regime of fixed exchange rate the Central Bank sets the exchange rate at a certain level against the currency of any country to which the «tied» the currency of the country, the currency basket (usually it consists of currencies of major trading partners) or to the international monetary one.

Feature a fixed rate is that it remains unchanged for a longer or shorter time (several years or several months), that is not dependent on changes in supply and demand for the currency. Change the fixed rate is a result of its formal review (depreciation – decrease or revaluation – increase).

With a fixed rate the central bank often sets the various courses on individual transactions – treatment of multiple exchange rates. Fixed exchange rate regime is usually installed in countries with rigid exchange restrictions and non-convertible currency.

Mode of the «floating» or floating its currency

This mode is typical for countries where currency restrictions are absent or insignificant. Under such a regime exchange rate changes with relative ease under the influence of supply and demand for the currency. «Demand creates supply», the well-known position, but in complex systems is possible by introducing a second level of innovation in the process, it becomes the source of his self-control and random evolutionary dynamics[34 - Камзин Н.Л. Типографское СМИ и конвергенция медиа // Информационное поле современной России: практики и эффекты: Материалы Восьмой Международной научно-практической конференции 20 – 22 октября 2011 года / Под. ред. В.З. Гарифуллина / Вып. ред. Р.П. Баканов. – Казань: Казан. ун-т. 2011. С. 265.].

Mode «floating» exchange rate does not preclude holding the Central Bank of various measures aimed at regulating the exchange rate. In March 1973 the country switched to floating exchange rates. However, the dominant state-controlled swimming rates.

Intermediate versions of exchange rate regime

For intermediate between a fixed and «floating» exchange rate regime options are:

– Mode «sliding lock», in which the Central Bank sets the exchange rate daily based on certain factors: inflation, balance of payments, changes in the value of official gold reserves, etc.;

– Mode of «currency corridor» in which the central bank sets the upper and lower limits of the exchange rate variations. Mode «currency corridor» as a mode called «soft commit» (if set narrow limits of variation) and the mode of «managed float» (if the corridor is wide enough). The wider «corridor», the more the movement of the exchange rate corresponds to the actual ratio of market supply and demand for currency[35 - Требич К.В. Развитие теории валютного курса и возможности ее эмпирической проверки // Вестник СПбГУ. 2006. С. 176.];

– The mode of «co» or «collective diving» rates, which rates countries – members of the group supported the currency in relation to each other within the «currency corridor» and «swim together» around the office, outside the group.

The development of the exchange rate regime of the ruble in Russia. After the entry of Russia in 1992, the IMF, the Central Bank refused treatment of multiple exchange rates and imposed a regime of «floating» exchange rate. Since mid-1995 mode of the «floating» exchange rate regime was replaced by «currency corridor». In 1995-1997 The Bank of Russia established the absolute values of the upper and lower bounds on the exchange rate variations, and later introduced «horizontal trading band» with a central rate of the ruble to the U.S. dollar to possible deviations from it within certain limits. This «corridor» has been extended August 17, 1998, and since September 1998 exchange rate is set to «free float».

3.6. Currency quotation

Exchange rates – defining the proportions of exchange, that is, the mobile market rates of the day. They depend on the condition of the course yesterday, before closing, and on major international stock exchanges – from Tokyo to New York, what are the views of market conditions, foreign exchange potential of the banks. Full quotation includes the selling rate (usually higher) and buying (lower). The difference (margin) account fees.

Turnover on international stock exchanges, as well as short-term play money capital in order to profit from the difference in interest rates and exchange rates in the hundreds of times higher than world trade[36 - Богомолов О.Т. Мировая экономика в век глобализации. – М.: ЗАО «Издательство «Экономика». 2007. – С. 140.].

Exchange rates (currency quotation) – To identify and exchange rate chosen on the basis of market mechanisms[37 - Киреев А.П. Международная экономика. В 2-х ч. – Ч. II. Международная макроэкономика: открытая экономика и макроэкономическое программирование. – М.: Юрайт-Издат. 2006. – С. 189.].