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Fixed vs. floating exchange rates

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Describe briefly the advantages and disadvantages of both floating and fixed exchange-rate systems. Which do you think the world will move toward in the future?
Give your response some thought, cite all sources.

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Solution Summary

The answer to this problem explains fixed and floating exchange rate system. The references related to the answer are also included.

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The advantages of the floating exchange rate are:
There is automatic adjustment for countries with a large deficit in balance of payments. The floating exchange rate helps reduce the overall deficit in the balance of trade. The floating exchange rate allows the central bank flexibility in fixing interest rates. Pre-determined bands do not have to be followed. The government does not have to internationally manage exchange rates, there is no need for frequent interventions by the Federal Reserve, and capital flow restrictions do not have to be imposed.

The disadvantages of floating exchange rate:
There is relatively higher volatility in predicting exchange rates. This means scarce resources have to be used to predict exchange rates. Existing problems in the economy are aggravated with the floating exchange rates. ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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