International Finance Theory and Policy
by Steven M. Suranovic
Finance 110-0
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Fixed vs. Floating Exchange Rates: OverviewThis section addresses what is perhaps the most
important policy issue in international finance, whether to have fixed
or floating exchange rates. The chapter focuses on three main features
that affect the choice of system; volatility and risk, inflationary consequences
and monetary autonomy. Inflationary consequences are shown to be a major potential problem for countries with floating exchange rates. For many countries facing this problem, fixed exchange rate systems can provide relief. The section shows that the relationship between inflation and the exchange rate system is an important element in the choice of system. Finally, monetary autonomy, and the ability to control the economy, is
lost with the choice of fixed exchange rates. We discuss why this loss
of autonomy can be problematic in some circumstances but not in others.
International Finance Theory and Policy - Chapter 110-0: Last Updated on 12/2/05 |