Impact of the Fixed Exchange Rate Regime in Barbados

One of the first changes made by the IMF after instituting Jamaica a loan was the devaluation of the Jamaica currency. Even though the devaluation of the currency made exports from Jamaica cheaper to purchase, Jamaica is a country that relies on imports to survive, and devaluation makes imports extremely expensive. This then decreased the amount that Jamaica could import, and with already decreased government spending, Jamaica could not sustain itself with enough goods.

On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke and Schuler, 2002). With this fixed exchange rate, the Argentinean government was hoping to preserve the value of their currency and stabilize inflation. The peg was initially successful, as it cured hyperinflation that occurred at the end of the 1980s and provided price stability needed for economic growth in the early 1990s. However, by the late 1990s,

External stability – stable exchange rate, a sustainable level of foreign debt and the current account deficit (CAD) 

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

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

The depreciation of naira over the years has caused many firms especially the import dependent firms to suffer many loses as a result of exchange rate fluctuations. This has further led to difficulty in

Barbados carries on trade with other Caribbean nations and has diplomatic relations with Cuba. Their closest relations are with the United States, and the United Kingdom. Barbados joined the United Nations is 1966. The economy of Barbados is one of the 35 upper middle-income countries of the world. They have a free-market economy, but the dominant sector is private. Their economy is based on sugar and tourism, but the government has encouraged a policy of diversification in order to achieve a more stable nation. They also depend on a light manufacturing industry. Their monetary unit is the Barbados dollar. The coins are made in 1, 5, 10, and 25 cents. The paper money is made in 1, 5, 10, 20, and 100 dollar bills. One U.S. dollar is equal to 2.01 Barbados dollars (1975).

Introduction: What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past four months that have affected the value of the Australian dollar?

Brazil has always been a volatile economy, and quite a challenge for the Central Bank to manage. In the 90s, Brazil’s currency, heavily discredited due to a high inflation (which almost hit an annual rate of 7,000% in 1990) was anchored to the US dollar, to import credibility, aiming at stabilizing prices. This also indexed prices to the US dollar, causing inflation to rise whenever the US dollar rose. On top of that, Brazil has always had a savings glut which has traditionally been financed by foreign investors. As such, until 2003, whenever there was a global confidence crisis, investors would withdraw funds from Brazil, and the Central Bank would raise interest rates to convince investors to keep their money in Brazil. This dynamic created a vicious cycle, as higher interest rates would cause investments to be more expensive when risk aversion increased, contributing to the volatility of long-term investments in the Brazilian economy.

The Jamaican economy is based on the free market model, and has few restrictions on trade, investment and movement of currency. The major productive sectors over the years have included tourism, mining, agriculture, information technology & telecommunications, manufacturing and the entertainment sector. Jamaica’s economy is presently very dependent on services, according to the CIA world fact book report of 2010, with it accounting for more than sixty (60%) of GDP. The country is also highly indebted and has a debt to GDP ratio of over 120%, indicating that based on Jamaica’s GDP it is extremely difficult for the country to pay off its increasing debt. Adding to this is the IMF loan

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.

dollar. In dollarization, the country abolishes its own currency and uses a foreign currency, such as the U.S. dollar, for all domestic transactions. 6. Emerging market exchange rate regimes. High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from the perspective of emerging market nations? There is no doubt that for many emerging markets a currency board, dollarization, and freely-floating exchange rate regimes are all extremes. In fact, many experts feel that the global financial marketplace will drive more and more emerging market nations towards one of these extremes. As illustrated by Exhibit 2.5, there is a distinct lack of “middle ground” left between rigidly fixed and freely floating. In anecdotal support of this argument, a poll of the general population in Mexico in 1999 indicated that 9 out of 10 people would prefer dollarization over a floating-rate peso. Clearly, there are many in the emerging markets of the world who have little faith in their leadership and institutions to implement an effective exchange rate policy.

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.

The Lebanese pound is firmly pegged to the American dollar since September 1999. Furthermore Lebanese currency has “undetermined competitiveness, with merchandise exports falling from 23% of GDP in 1989 to 4% in 2000”.