Sample Essay on Fixed Exchange Rate

Fixed Exchange Rate

Fixed exchange rate is at timed known as pegged exchange rate and it’s a kind of regime where the value of the currency is fixed against the currency of another country to another value measure like gold. This kind of currency is used for purposes of stabilizing the value of one currency against the one it is pegged to. This in turn makes investments and trade easier and predictable between two currencies. This is especially of great use to smaller economies whose external trade contributed to the gross domestic product.

What is more, it is also used as the most suitable means for controlling inflation. While this is the case, while the reference value increases and goes down, the currency that is pegged to it is also affected. Fixed exchange rate was common during the twentieth century. Governments favored such systems because they believed it came with key advantages such as lowering speculative capital flow risks, introducing great discipline on local policies to get rid of inflation and removing exchange risk while promoting international trade.

Other benefits associated with fixed exchange rate are as highlighted below:

  • Speculative capital flow-In a system with a fixed exchange rate, high inflation within a country makes buyers who are overseas pay high prices for the exports of that country. It additionally makes the import sector of that Proofreading-Editingcountry less competitive. This means that as the imports are strengthened, the exports are weakened.
  • No risk associated with exchange rate-Fixed exchange rate gets rid of the risk associated with changes in exchange rate. It was assumed absence of such risk would be beneficial to capital flow and international trade.
  • Lack of automatic adjustment to payment of disequilibrium balance-This kind of rate doesn’t automatically correct balance of payment. The government is forced to make corrections in such cases by increase the interest rate and reducing domestic demand. Consequently, this restrains the economic policies at a domestic level from focus on inflation and unemployment.

Other advantages associated with fixed exchange rate include inherent instability and the prerequisite for foreign exchange reserves that are large. In a system where the fixed exchange rate is used, the government of the given country makes the decision regarding its currency’s worth in relation to either the fixed amount of another country’s currency, fixed gold weight. Typically, the market mechanism used is an open one in which case the central bank of that country makes provision of foreign currency that is required for payment imbalance financing.

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