Analyze Alternative Exchange Rate Regimes Essay Example | Topics and Well Written Essays - 500 words

Analyze Alternative Exchange Rate Regimes - Essay Example Flexible exchange rate constantly moves back and forth. Most of the country of the world keeps US dollars as a reserve currency against their own money. When we mean flexible exchange rate of a country’s currency, we denote its value with reference to US dollar. Change of international value of the dollar will affect the exchange rate of country’s currency against the dollar. There is no perfect model (Wray, 2011) to predict the movement of international value of US dollar. There is no perfect model that can predict exchange rate of a country’s currency against US Dollar. Flexible exchange rate has advantages; independent monitory policy, promotes economic development, promotes international trade, and increases international liquidity. Government operating with flexible exchange rate does not undertake responsibility of currency conversion. Government does not need to fear that it will run out of foreign currency reserves. In case of using flexible exchange rate monitory policy of the country is not limited or affected by the economic conditions of other country. Thus, it promotes economic development leading to full employment. Since, government does not control the exchange rate, restriction on international trade is removed which contributes to free moving of capital among countries. Flexible exchange rate removes the necessity of keeping foreign exchange reserves thus, increases international liquidity of the currency. In a fixed exchange rate system, the currency has a target rate based on other currency or basket of other currencies (Wray, 2011). This is how government is controlling value between two currencies. If the government let the currency float it can trigger domestic inflation. Government will be printing paper money, and its monitory policy will be affected, as well as the job market. When export and import elasticity is extremely low (Wray, 2011),