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Manipulating Currency & Exchange-Rate Systems

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- Describe briefly the advantages and disadvantages of i) the floating and ii) the fixed exchange-rate systems. Which do you think the world will move toward in the future?

- China is seen as a fixed-rate regime, and was even an issue in the last Presidential election (see http://www.nytimes.com/2012/10/15/business/global/china-contends-market-sets-value-of-its-currency.html ) China denies manipulating its currency - but it (undeniably) does - how does this help China and hurt the US?

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1i) There are some advantages of the fixed rate system. These include fixed rates reduces speculation. The fixed rate encourages the government not to go in for inflationary policies. Also the fixed rate reduces risk in foreign trade and this encourages exports.

The disadvantages of fixed rate system include the following. The internal fiscal/monetary policy gets constrained. This also requires large foreign exchange holdings, the balance of payment and adjustment is not automatic. Finally, inflationary pressures often compel countries with fixed rates to devalue their currency(a). ...

Solution Summary

The expert describes the advantages and disadvantages of the floating and fixed exchange-rate systems.