Currency Relations and the Balance of Payments
The Essence of Currency Relations and Exchange Rate Policy
There is a necessity to exchange the money of one country for the money of another country due to the international payments for world economic turnover and the credit, foreign direct investment and other international relations. On this basis there are currency relations as a set of monetary relations, mediating the payment transactions between agents (entities) of the global economy. Participants of these relationship are banks, financial institutions, departments of large companies and brokers. The currency relations is an essential element of modern market relations, that's why they are adjustable by such factors as profit maximization and competition (supply and demand).
The place of currency relations in the world economic system is determined by the fact that they mediate the relationship of international trade, the international movement of factors of production, acting, on the one hand, upon these relations, on the other hand being under their influence. Speaking about the final causes of processes occurring in the currency sphere (mainly exchange rate movements), they are determined by processes in the sphere of production, and are developed under the influence of changes in the ratio of economic forces between countries or groups of countries.
The exchange rate policy is an important instrument for the expanding of world economic relations and is a combination of economic, legal and organizational measures and forms that are used by the government, central bank and financial institutions, international monetary and credit institutions in the field of the currency relations.
The exchange rate policy is determined by the currency legislation, which includes a set of legal rules on the regulation of the procedure for operations with currency values in the country and abroad, as well as exchange-control agreements between states on monetary problems (bilateral and multilateral).
The main element of exchange rate policy is the exchange regulation.
The exchange regulation is the state regulation regime of currency transactions, international payments, and the definition of common principles of exchange control regulations, the powers of government bodies and functions of banks and other financial institutions in the regulation of currency transactions, the rights and duties of entities of currency transactions, the procedure for the exchange regulation, the responsibility for currency offenses.
The exchange regulation is carried out on the interstate, regional and national levels.
The necessity of the exchange regulation on the interstate and regional levels is caused by the processes of integration and transnationalization, the development of international economic relations, the emergence of world economic division of labor. Interstate and regional exchange regulations are focused on coordinating monetary and fiscal policies of individual countries and economic integration organizations; on the development of common measures to overcome the currency crisis; on the development of common approaches to monetary policy. Such coordinated foreign exchange regulations helps to reduce the degree of autonomy of national economic policies and to increase interdependence of the different currency areas of national economies.
The exchange regulation on the national level takes into account the requirements of the IMF and the regional associations, which include the particular states. Its strategy and tactics is fixed in the legal and regulatory methodical documents.
The national system of exchange regulation, in general, determines the entities of exchange regulation, the procedure for operations with currency values, the status of the currency and the exchange rate, the powers of the government and functions of the banking system in the sphere of the exchange regulation and exchange control.
The exchange rate policy, depending on its objectives and forms, are divided into current and long-term policy.
The current exchange rate policy is a set of short-term measures aimed at daily operational control of the exchange rates, currency transactions, foreign exchange market activity by instrumentality of interest rate policy and the policy of foreign exchange market intervention. The purpose of the current exchange rate policy is to ensure the normal functioning of international and national mechanisms for the global currency system, as well as the balance of payments equilibrium.
Long-term (structural) exchange rate policy provides long-term structural measures based on the serial changes in the exchange mechanism. In order to implement it, interstate negotiations and agreements, particularly within the IMF and on the regional level take place. The currency reforms, including measures directed to the change of the key elements of the monetary system, such as the order of international payments, the exchange rate regime and the par of exchange, the usage of gold and reserve currencies, international means of payments, functional tasks of international and regional monetary and financial institutions, are used too.
The main forms of exchange rate policy are the interest rate policy and the policy of foreign exchange market intervention.
The interest rate policy is a system of economic, legal and institutional measures directed on the use of the interest rate of return for investments traffic control and balancing payment obligations, oriented exchange-rate adjustments.
The policy of foreign exchange market intervention is a system of regulation of the exchange rate by buying and selling foreign currency by government agencies. Its varieties are currency intervention, currency restrictions, diversification of foreign exchange reserves, regulation degree of currency convertibility, the exchange rate regime, devaluation and revaluation.