Advantages And Disadvantages Of A Pegged Exchange Rate System

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

These three financial crises are some of the most popular financial problems to affect Mexico and Asia. One of the common characteristics that become evident in all the three cases is with regards to exchange rates. In all the three crisis, pegged exchange rates relied against the dollar but the governments were unable to keep the values of these currencies parallel with the dollar. In the events leading up to the 1982 crisis, the exchange rate of the peso was overvalued. The resulting inflation and continued borrowing and worsening terms of trade that contributed to the problem. In 1994, the crawling peg of the Mexican peso would face similar problems when the US Federal Reserve raised policy rates. It is also worth noting that deteriorating

Stanek, M. B. (2002). A review of exchange rate policies and their effect upon nations and

dollar resulting in the poor economic performance, the Australian government devalued the Australian dollar against the U.S. dollar by 12% in 1974 and replaced the peg to U.S. dollar with the peg to basket of currencies of each countries weight in the basket determined by its trading in Australia. It was promoted that it is appropriate to focus more on the effective exchange rates which showed a better way to examine the movement of domestic currency against the currencies of other countries. During this time also the government was facing a shortages of capital inflow and in 1974 the government responded with the lack of capital inflow by reducing the restriction on the borrowing for the period of 6 months to 2 years. In 1975, the restriction applied to the non-residents in fixed interest securities were also removed. This lead to an improved economy in 1976 but the capital inflow and the balance of payments were in deficit. The government devalued the Australian dollar by 17.5% against the trade-weighted index. (Manuell,

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

Examine the connection and the differences between the official exchange rate market controlled by the CADIVI and the permuta. Discuss the states of equilibrium in each of these markets. Central banks intervene in foreign exchange markets in order to achieve a variety of overall economic objectives, such as controlling inflation, maintaining competitiveness or maintaining financial stability. The precise objectives of policy and how they are reflected in foreign exchange market intervention depend on a number of factors, including the stage of a country‟s development, the degree of financial market development and integration, and a country‟s overall vulnerability to shocks. The precise definition of which operations in forex markets

Global finance operations include financial procedures, such as accounting, financial planning and analysis, strategic planning, treasury, investor relations, and financial compliance. Exchange rate is the existing market cost for which one currency can be exchanged for another (Moffatt, n.d.). For instance, when the U.S. exchange rate for the Japanese Yen is ¥1.10, this means that 1 American Dollar can be exchanged for 1.1 Japanese Yen. The purpose of this paper is to analyze the exchange rate mechanism (Euro Currency Markets), to describe how this mechanism is used in global financing operations, and to analyze its importance in managing risks.

8. How can a central bank peg the value of its currency relative to another currency?

The fixed exchange rate regime of 1945-1973 failed because of widely diverging national monetary and fiscal policies, differential rates of inflation, and various unexpected external shocks. The U.S. dollar was the main reserve currency held by central banks was the key to the web of exchange rate values. The United States ran persistent and growing deficits in its balance of payments requiring a

We use the term "reserve currency" when we mean other countries ' use of dollars in international trade. If Sweden, for example, buys goods from China, the goods can be paid with American dollars instead of Swedish Krona. The methodological approach to address how, when and why the dollar became the world’s reserve currency will be supported by a historical and statistical analysis. With a better understanding on how the U.S dollar become the most powerful currency we can advance to understand the cost and benefits of it.

The financial crisis in the early 2000’s has raised questions on the linkage between the monetary policy and the financial markets. This document will analyze the impact of a country’s net balance of payments on the exchange rate of the country’s currency. An analysis of the impact of a country’s net level of interest rates and nominal inflation rate on the country’s exchanged rate will also be reviewed. In addition, a review of the growth in a country’s Gross National Product will be analyzed to determine if there is any relationship to a country’s trade deficits. Finally, a recommendation will be presented on how monetary policies could be employed in the future.

Prior to 1970, fixed, or say pegged exchange rate regime was adopted by almost all countries worldwide. Afterwards, some countries have gradually made the transition from fixed to flexible exchange rates, which allow currency to float

One of the premier Baltic States, Latvia is a rather small country with a population of 2.5 million located in Northern Europe. For the latter half of the 20th Century it was under the control of the Soviet Union, however, it broke free after the collapse of the Soviet Union and declared independence on August 21st, 1991. Following its independence, it experiences rapid economic growth, and to further establish themselves in the global marketplace Latvia pegged its currency, the lat, to the value of the euro as it had recently joined the European Union in 2004. However, Latvia was not able to sustain this rapid economic growth, and it only was a matter of time before the expansion would transform into a crisis. This case displays how pegging currencies, influxes change in foreign money and investment, and the purpose of the IMF all affected the market economy.

Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.