Currency reserves
Using Reserves to Stabilize Currency How a central bank could use foreign currency reserves to keep its own currency from devaluing
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- In the last video we saw however we wanted country A to get excited about investing in country B,
- they wanted to convert their currency into country B's currency.
- And left to it's own devices, with this new demand for currency B,
- it would have made currency B more expensive.
- But instead of allowing that to happen, the central bank of country B said:
- "No, no, no, no. I want to keep the exchange rates relatively stable,
- so I'm going to print B's and use those to buy up A".
- And so in the end of that video, the central bank of country B ended up with foreign currency reserves,
- it ended up with some of A's currency in it's balance sheet.
- What I wanna do in this video is think about what happens if demand goes the other way?
- And how could the central bank use its foreign currency reserves
- to prevent its currency from devaluating.
- So, let's go to the next stage in this little hypothetical story here.
- Let's say people in A, so all this investment happened in country B, everyone was all excited,
- probably a bubble was forming of some kind.
- And then, all of a sudden, people of the investors in country A start to get a little bit scared
- they start to hear reports of the bubble forming,
- they start to realise that conditions in country B weren't as good as
- they thought it might have been...
- Initially, they start to panic and they start going to unwind their investments
- so whatever they had in country B they wanna sell it
- they get B's currency for it, and they wanna convert that to their home currency
- so now you have the reverse situation of what we saw on the last video.
- Everyone wants so sell their B's, so they invested in country B,
- maybe they bought some real state there, they're gonna sell their real state
- and they're gonna get B for it.
- And then they're going to get out of that country's currency.
- They're going to wanna convert that money back into A.
- But this is the opposite situation.
- Now everyone wants to run out of country B
- and there isn't a lot of supply of A in return.
- And no one's really looking to trade A for B now.
- The market is going completely in the opposite direction.
- Now, if, once again, foreign exchange markets were allowed to float freely,
- what would happen?
- Well, in this situation, all the demand is in for the A's
- and all supplies on the B, so you would have either more (let me write this)
- fewer A's per B, or you could have more B's per A.
- In general, A has now become more expensive in terms of B
- or B has become cheaper in terms of A.
- But let's say you're the central bank and you're like "I don't like this either"
- Now, all of a sudden, specially if usually in unwinding
- this panic happens as much faster and in more dramatic fashion than the initial face over here
- You say: "Oh my God, people in our country, they might not be able to, if this were to happen,
- foreign imports would become so expensive people might not be able to even affort food
- that we have to import from other countries or essential suplies from other countries".
- So they say: "No, we're going to intervene. We were able to accumulate
- some of this foreign country reserves and so we can use those now to try to stabilize our currency".
- So in this situation, what the central bank would to is say:
- "Okay, I've got some reserves of A. What I'm going to do is I'm going to do to the open market
- and also sell my reserves of A and try to equalize the supply and the demand".
- And so once again if they're able to sell this reserves,
- now, all of a sudden, their currency will not devalue
- or maybe not devalue as much.
- Now, the one kink in the system here is that they only have a finite amount of reserves.
- This, right over here, is finite.
- In the previous video, when we saw that they were printing their own currency to buy,
- to build reserves, they could do this all day all night,
- because they have the right to print as much as their own currency as they want.
- But now they're using reserves of someone else's currency to keep their own currency from being devalued.
- But they can't print someone else's currency.
- So they're hoping that what they have on hand is enough to fight this
- (what they're probably percieving as a short imbalance)
- but it could be scary. What happens if all of this currency runs out?
- Then they blow all of their currency reserves and if this kind of panic keeps occuring,
- then you're going to go back to the free market forces and their currency will have to devalue.
- So that's how central banks attempt to keep their currencies relativaly stable.
- In future videos we'll go through real cases of when this hapened and what exactly happened
- when the foreign currency reserves ran out
- and how speculators could use their knowledge to essentially
- make an easy speculative bug.
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.