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Monetary Economics in Developing Countries - Essay Example

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Exchange rates can both be fixed or flexible and as such, differ from one country to another. An exchange rate is said to be fixed when the countries involved retain…
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Monetary Economics in Developing Countries
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Monetary Economics in Developing Countries

The two exchange rate systems have their advantages and disadvantages in their application in a country’s economy. The advantages of the fixed exchange rate system include stimulating international trade as they offer much more stability for both importers and exporters and as such, they do not have to worry about the effects of currency appreciation and depreciation. Fixed exchange rate systems are also said to have a bit of control over the speculative nature of importers and exporters and thus reduce to a certain extent speculative activity in trade practices. This regime disadvantage can be depicted in the inefficiency of a country’s economy. This happens as a result of the government’s artificial support of the exchange rate which means it does not change accordingly with changes in the prevailing economic conditions and thus may loose out from the benefits that would be felt in the economy if the rate was adjusted according to the existing conditions. Furthermore, the dependence of interest rates on the exchange rate can lead to reduced economic growth of a country in cases where they differ greatly with those being experienced in the market. In cases where one of the countries involved in the fixed exchange rate system agreement has a weaker economy, it may be dominated by the country with a stronger economy and at the same time undermine the prevailing market situation in the country with the weaker economy.
Similarly, the flexible exchange rate regime has its advantages and disadvantages. The major advantage of this regime is its flexibility as it allows a country’s economy to adjust quickly to prevailing market conditions. This system also determines the interest rate in a country allowing for effective control of the economy in order to create balance. Despite its advantages, the flexible exchange rate system may lead to volatility in the market as it does not encourage ... Read More
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