Posted: February 19th, 2022
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Please submit your reflections on what you’ve learned in Module 3. Your submission should be 500-600 words in word or pdf format.
There has been global interest in creating and acquiring differentCrypto-currencies over the past 2-3 years but the market for these currencieshas been very volatile. Using example of the drastic changes in the value ofdifferent currencies discuss why it is such a volatile market and if it can bestabilized
Student 1 Reply
In myopinion, a flexible exchange rate plays a crucial role in smoothing outputvolatility in emerging market economies EMEs. However, as highlighted byseveral papers in this volume, a highly volatile exchange rate can increaseoutput volatility and itself become a source of vulnerability. Second, over thepast five years, most official forex interventions in EMEs were intended tostem volatility rather than to achieve a particular exchange rate. Finally, themajority view was that exchange rate intervention needs to be consistent withthe monetary policy stance. Persistent, one-sided intervention, associated withsharp expansion of central bank balance sheets, creates risks for the economy.
I did read in an article that Lack of clout, undiversified economies, andrestrictive regulation are the contributing factors that make emerging marketcurrencies more volatile than their developed counterparts. The former twocontribute to the latters existence, which is what affects people like myselfthe most in terms of restricting citizens financial freedom. I am not arguingthat emerging market countries should prioritize making it easier for peoplelike me to buy things on Amazon.com, thoughinstead, that perhaps a moreprogressive approach could encourage more sustainable foreign investment andeconomic development, with the spillover effects granting more financialfreedom to consumers.
With regards to the solutions, I would be fascinated to see an emerging marketcountry introduce a cryptocurrency and attempt to roll out a digital financialeconomy. We could keep an eye on developments here, because it could usher in acompletely new concept of macroeconomic financial management.
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