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A Report on Reasons why Governments Prefer Financial Systems featuring Fixed - Essay Example
Finance & Accounting
Pages 10 (2510 words)
A Report on Reasons why Governments Prefer Financial Systems featuring Fixed Exchange Rates while Private Investors Favor Floating Exchange Rates. Pegged Exchange Rates Fixed exchange rate, also called a pegged exchange rate, is sett by the government and is maintained as the official exchange rate…
On the other hand, a floating rate of exchange is the one that is moving and received currency depends on exchange time.To maintain their local exchange rate, central banks of European Union members bought and sold their own currency in foreign exchange markets, and in return, they acquired their pegged currency. For example, if the value of a single local unit currency is US$4, the central bank ensures that those dollars can be supplied in market by the country. High foreign reserve levels are required so as to maintain the rates (Eichengreen & Ricardo, 1999). High foreign reserve levels also ensure that there is good money supply thus preventing inflation/ deflation. An exchange rate refers to the rate at which one currency is exchanged for another. Therefore, it is the value of a country’s currency in terms of another. From 1870 to 1914, the global exchange rate was fixed. During that time, currency was likened to gold, implying that a local currency’s value was set at a fixed exchange rate that was determined in terms of gold ounces, that is, the gold standard (Eichengreen & Ricardo, 1999). This allowed free capital mobility and global stability in trade and currencies. ...
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