monetary policy

The application of monetary policy mainly changes the interest rate by adjusting the discount rate, which causes the change of domestic currency value and stimulates the international capital flow, thus causing the change of foreign exchange supply and demand, and then causing the change of exchange rate. When the exchange rate rises and tends to exceed the upper limit of exchange rate fluctuation, the country's monetary authorities often raise the discount rate, thus driving the overall level of interest rates to rise. On the one hand, the currency shrinks and the real value of the local currency increases; On the other hand, it attracts foreign capital inflows and increases the country's foreign exchange income, thus reducing the balance of payments deficit, making the local currency exchange rate rise and the foreign currency exchange rate fall, and keeping the exchange rate within the prescribed fluctuation range.

When the exchange rate is lower than the prescribed lower limit, the discount rate will be reduced, which will lead to the decline of the overall interest rate, increase the domestic money supply, reduce the domestic value of the local currency, increase the domestic foreign exchange demand, and finally make the exchange rate change within the prescribed range.

(2) Adjusting foreign exchange gold reserves

In order to meet the needs of foreign political and economic exchanges, a country must maintain a certain amount of gold and foreign exchange reserves. Gold and foreign exchange reserves are not only liquidity for international exchanges, but also reserve forces for maintaining exchange rate stability and one of the means to make up the balance of payments deficit. Management authorities often use their gold and foreign exchange reserves to stabilize the relationship between foreign exchange supply and demand by participating in foreign exchange market transactions, so as to keep the exchange rate fluctuating within the prescribed upper and lower limits.

(3) Implementing foreign exchange control.

A country's balance of payments situation is extremely severe and the balance of payments has deteriorated for a long time. Its gold foreign exchange reserves are insufficient and it is impossible to intervene by buying and selling foreign exchange in the foreign exchange market. Therefore, it relies on foreign exchange control measures, such as directly limiting foreign exchange expenditures or even directly controlling exchange rate changes.

(4) Borrowing from the International Monetary Fund

When a country has a temporary balance of payments deficit, which may lead to exchange rate fluctuations exceeding the prescribed range, and the use of foreign exchange gold reserves is not enough to intervene in the foreign exchange market, it can apply for loans from the International Monetary Fund. This will reduce or avoid the negative impact on economic development caused by the hasty devaluation of the national currency, tightening macro-policies or resorting to extraordinary measures to correct the imbalance of international payments.

(five) the implementation of legal tender appreciation or depreciation.

When there is a huge surplus in the balance of payments for a long time, it will generally lead to a sharp rise in the domestic exchange rate, exceeding the prescribed upper limit, and the monetary management authorities should legally appreciate the domestic currency. However, although the foreign exchange reserves of surplus countries increase greatly, which is easy to cause inflation, the government can adopt offset policies to reduce the impact of surplus on money supply, and as a result, the internal pressure of legal appreciation of surplus countries' currencies is seriously weakened.

However, when there is a huge deficit in the balance of payments for a long time, and it is impossible to stabilize the exchange rate by the above-mentioned means 1-4, the monetary authorities often implement the legal devaluation of the currency (explicitly announce the reduction of the gold content of the domestic currency by decree). When the currency depreciates, it forms a new gold parity with other currencies, which is manifested in the rise of the foreign exchange rate. This can reduce the loss of domestic foreign exchange gold reserves caused by maintaining the original exchange rate, improve the export competitiveness of domestic commodities, increase export income, improve the balance of payments, and help maintain the new exchange rate stability.