Fixed vs floating exchange rate system

Exchange Rate regime

1. Fixed vs Floating Exchange Rate System By Pankaj Newar 13A2HP029

2. AGENDA Fixed Exchange Rates Benefits Breakup of Fixed Exchange Rate Floating Exchange Rate Benefits

3. Exchange Rates It is value of one nations currency in comparison to another Types: 1) Fixed Exchange Rate 2) Floating Exchange Rate

4. Fixed Exchange Rates A  fixed exchange rate pegs one country's  currency to another country’s currency The government of a country doesn’t let the exchange rate change in accordance with the demand and supply for the currency The purpose of a fixed rate system is to maintain a country’s currency value within a very narrow band.

5. Country with Fixed Exchange Rate Country Currency Peg Rate Peg Currency Bermuda Bermuda Dollar (BMD) 1 USD UAE Dirham 3.673 USD Denmark Danish Krone 7.46 EUR Nepal Rupee 1.6 INR Latvia Lats (LVL) 0.7028 EUR

6. Benefits Promote International Trade Helpful for Small Nations Restricts Speculation Major Crisis Mexican Peso Crisis, 1994 Asian Currency Crisis, 1997

7. Breakup of Fixed Exchange Rate Macroeconomic Policy Package of 1965-1968 i.e., Finance Vietnam Conflicts Own welfare programs In August 1971, US President announced that dollar was no longer convertible into gold By March 1973, most of the currency began to float against each other

8. Floating Exchange Rate System A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Most widely traded currencies: US dollar, Euro, Japanese Yen, British pound & Australian Dollar

9. Benefits Automatic BOP adjustments Independent Monetary Policy Promotes Economic Development Increase in Liquidity

10. Conclusion There is no right answer for which exhange rate is better Advanced Economy: Floating Rate Emerging Economy: May gain from floating rate Underdeveloped Economy: Fixed Rate