Essay Sample on Fixed Exchange Rates: Advantages & Disadvantages

Introduction

To begin we can say that a fixed exchange rate is a system whereby the government of a country or state tries to ensure that his country maintains the currency's value. The central bank is the government's bank is the one with the mandate to make sure the value is maintained and if the value of the currency changes too much then the central bank must intervene in the situation. Therefore, some of the advantages, as well as disadvantages of fixed exchange rates, include.

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Advantages

Eradication of Uncertainty, as Well as Risk

Stability of an exchange rate, depends on the necessary condition of an orderly as well as steady trade growth. Fluctuation in exchange rate causes problems in planning as well as programming of the exporters plus importers. In elaborating this, export-earners incomes, as well as the cost of the import of importers, tend to become uncertain when there is fluctuation in the exchange rate. The uncertainty can be erased by a fixed exchange rate method, hence any risk associated the global trade, as well as an investment, is minimized largely is the exchange rates do not vary.

It Prevents Depreciation of the Currency

In this case, we can say that under a circumstance when there are frequent changes in the exchange rate, there will be an eruption of the balance of payment crisis causing the continuous depreciation of the state's currency in comparison to other countries' currencies whose currencies are still stable (Sihabuddin, 2016). Therefore, we can say that the depreciation of a countries currency is caused by unbalanced exchange rates. But we can solve this by making sure that the exchange rate is stable.

Attracting Foreign Investments

The exchange rates of a country are stable many investors will run to your country so as to invest since the environment is good for business. But if the exchange rates change from time to time then it will deter potential investors into a country hence this will lead to the rapid growth of the country's economy if the exchange rates are fixed or decrease of the economy if the rates aren't fixed.

Anti-Inflationary

The government allows the exchange rates to decline, then the imported goods will be much cherished making their prices to high leading to inflation. Therefore, in order to solve this, the government has to ensure that there is a fixed exchange rate in his country.

Disadvantages

Internal objectives of growth, as well as the sacrifice of full employment

States, experience fundamental disequilibrium in the balance of payment, they end up falling with their reserved foreign exchange, hence they evaluate the problem and come up with internal measures to solve the issue. With this issue, there will be unemployment problems as well as prices of goods shooting up leading to the decline of economic growth.

Suitability of foreign exchange reserves

The situation is common in poor countries that are still developing where the country finds it hard to maintain the suitability volume of the reserve foreign exchange lowering down the stability of the currency.

Work Cited

Moreira, Ricardo Ramalhete. "Alternative economic policy under a regime with inflation targeting, primary surpluses and a floating exchange rate: an analysis for developing economies." European Journal of Economics and Economic Policies: Intervention 15.1 (2018): 71-90.

Sihabuddin, Agus, and Sri Hartati. "Exchange rates forecasting using nonlinear autoregressive." AIP Conference Proceedings. Vol. 1755. No. 1. AIP Publishing LLC, 2016.