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interest rates were so high
high interest in domestic country means lots of capital inflow, wich means high demand for domestic bonds, wich means high demand for domestic currency, wich will lead to an appreciation of the domestic currency
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In the event of a floating price, speculation may happen
With a fixed exchange rate, there isn't much to speculate about. With floating exchange rates, speculation can lead to destabilising and hindering of the economic growth
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OMO
open market operation
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Theinvestors will sell the H bonds ( ) and buy the F bonds. This will cause the H currency to𝑅↑→𝑅𝑃↑depreciate in the short term. This improves the competitive position of the country and thus the CA.With a floating exchange rate, the balance of payments must always be in balance, we consequentlyknow that there is a K deficit: the country has too many foreign bonds. The overexposure to foreigncurrencies creates a feedback effect; eventually the H currency will appreciate again
good example of SFXO. Selling H bonds means supplying the bonds on the market, supply of Domestic currency increases. This depreciates the domestic currency, making home goods relatively cheaper. this increases the demand for home goods and thus the export. Export minus import increases, wich increases the current account. Bop must always be in balance, so this means we are having a negative K, wich is logical because we are buying foreign bonds with SFXO. The demand of these foreign bonds leads to appreciation of the foreign bonds, making them relatively more expensive, wich decreases the demand. Eventually the H currency will appreciate again
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