Floating exchange rates as a solution to economic and political stability

Stabilisation and growth

Finally, the last problem with fixed or targeted exchange rates is that confidence in the system has to be absolute or else pessimistic, self-fulfilling speculation will cause the collapse of the system. For example, it is thought that Europe and Japan are more willing to tolerate recession than inflation, while the United States prefers to keep interest rates low and the economy growing, even if prices do increase Whitt Lawday, David and Warren Cohen.

Happily, enormous effort has been made by the leading powers generally to restore price stability, and as part of that process to bring government deficits under control.

By the rules of the European Monetary System, short term credit lines have been freely available to support intervention to defend exchange rates. Third, changes in nominal exchange rate dynamics have repercussions on domestic price stability. The Quest for Exchange Rate Stability: But maintenance of the designated central rates at times of persistent pressure has required more than intervention; monetary policies have been tightened, tightened more than might otherwise have been the case in the face of domestic political and economic circumstances.

That will require keeping inflation under control, a desirable and attainable objective in both countries. Investors can use such moves to their advantage by investing overseas or in U. There is a reluctance to make a sufficiently strong commitment to stability for fear the effort could fail, at political and economic cost.

6 factors that influence exchange rates

Conversely, a significantly stronger currency can reduce export competitiveness and make imports cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-adjusting mechanism. So, that is why governments will not stick to targeted rates and what happens as a result.

First, we do not know any recent study on Ghana that has applied time-varying SVAR model to examine the sources of exchange rate fluctuations in Ghana and explores the implications of exchange rate pass-through effects on consumer price inflation. One young economist friend of mine has put it to me that further developments in chaos theory must await better understanding of exchange markets.

That is not the case in the world at large. And the ultimate costs of uncertainty and lower productivity are buried among the population at large. No doubt, too, broad markets and innovative instruments have greatly expanded hedging possibilities for many businesses seeking protection against short- to medium-term currency risks.

About this resource This coursework was submitted to us by a student in order to help you with your studies. In sum, exchange rates have been prone to move over a very wide range when underlying economic policies were in question and when they were not.

The damage is insidious.

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As discussed earlier, net exports have an inverse correlation with the strength of the domestic currency. The European Monetary System, which virtually collapsed inwas an attempt to fix exchange rates within certain tight bands, to coordinate monetary policy between member nations and to have central banks intervene to keep exchange rates within the bands when necessary.

Even if the government were willing to bow to international standards, nationalism is strong in the world today and most people do not look fondly upon consolidated global power witness the problems of the United Nations. Even that muted call was received by what could only charitably be described as coolness by Government officials and market participants alike.

These situations could hypothetically be avoided if central banks could intervene to prevent devaluation from ever becoming necessary. The key question is whether among the key countries with globally important currencies that same urge for stability exists to the degree necessary to support a broad reform effort.

This is largely because stability creates certainty and confidence and this encourages investment in technology and human capital.

International business can be a powerful political force, in part because: A.

Stabilisation and growth

a recent Supreme Court ruling in the United States allows corporate contributions to political races. B.

Exchange rate and macroeconomic stability: Determinants and Pass-through effects

many top management team members are willing to accept roles with national security agencies. C.

Exchange rate and macroeconomic stability: Determinants and Pass-through effects

about half the world's largest economic units are firms. Advocates of floating exchange rates base their case on the proposition that free markets tend to allocate resources efficiently.

More specifically, they claim that a floating rate system has two main benefits: economic stability and policy independence. Exchange rate and macroeconomic stability: Determinants and Pass-through effects seen substantial swings. On the average, the cedi has depreciated against the US dollar since the adoption of managed floating exchange rate regime in both the real and nominal exchange rates play a key role in the international transmission mechanism.

exchange rate stability significantly increased economic growth in lag 1 &2 by 30% and 50% respectively, while financial integration together with the financial institution depth. 18 Globalization and exchange rate policy been presented as technical solutions to technical economic problems.

Yet exchange rate policy is highly political. It is chosen by policy-makers often mobility, exchange rate stability, or monetary independence (Mundell In all those instances, difficult political and economic choices have been and are being made to preserve and enhance exchange rate stability as a matter of national priority.

The key question is whether among the key countries with globally important currencies that same urge for stability exists to the degree necessary to support a broad reform effort.

Floating exchange rates as a solution to economic and political stability
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Exchange rate and macroeconomic stability: Determinants and Pass-through effects - IGC