f Treasury are primarilyresonsible for keeping records on the Balance of Payments, which relates directly to thedetermination of the exchange rate. These agencies are responsible for keeping track ofthe flow of money that is used to purchase merchandise, securities, and services, as wellas payments made to other countries by the United States. In addition, these agencies areresponsible for determining when to intervene in the exchange rate. The International Monetary Fund (IMF) also attempts to intervene when the exchangerate needs to be stabilized. During the Asian currency crisis of 1998, the IMF attemptedto intervene using common tactics such as devaluing currencies, pushing up interest ratesand cutting public spending. Although opinions vary, some believe that the IMFsintervention actually made the crisis worse. Why? The high interest rates and cheapcurrencies had self-defeating consequences. For example, Korea now has to buy $60-$65worth of goods from abroad in order to export $100. These Korean companies cannotafford to buy imports and therefore also cannot take advantage of the cheaper labor thatwas a result of the intervention.2Balance of Payments and the Exchange RateThe most important factor in determining the exchange rate is the Balance of Payments,which is an accounting record of all international transactions for a particular countryduring a specified time period. The Balance of Payments is figured using two primaryaccounts: the current account and the capital account. The current account is furthersubdivided into four accounts: Merchandise Trade, Services, Income Receipts, andUnilateral Transfers. The Capital Account is also further divided into four accounts: Direct Foreign Investment, Portfolio Investment, Bank Related Flows, and OfficialReserve Transactions. In theory, the current account and the capital account shouldbalance and the sum of the balance of payments should be zero. However, due tostatistical ...
