A. Which are preferable and why, fixed, flexible, or a mixture of the two exchange rates?
b. What countries have officially dollarized their economies. How does the US benefit from it?
c. What is seigniorage?
a. Which are preferable and why, fixed, flexible, or a mixture of the two exchange rates?
Many economists think that in most circumstances, floating or flexible exchange rates are preferable to fixed exchange rates because floating or flexible rates are responsive to the foreign exchange market. In addition, fixed exchange rates deprive governments of the use of an independent domestic monetary policy to achieve internal stability.
However, in certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was ameliorated by the fixed exchange rate of the Chinese renminbi, and the IMF and the World Bank now acknowledge that Malaysia's adoption of a peg to the US dollar in the aftermath of the same crisis was highly successful.
Both "fixed" and "flexible" regimes have strengths and weaknesses. A fixed exchange rate is generally seen as being transparent and a simple anchor for monetary policy. Countries with weak institutions can "import" monetary credibility by anchoring to a currency with a credible central bank. A conventional view is that a fixed exchange rate has the advantage of reducing transaction costs and exchange rate risk. In countries with less developed financial sectors, economic agents may not have the financial tools to hedge long-term currency risks. But adjustments under fixed exchange rates can be very gradual and require significant flexibility in prices in the domestic economy, especially in the face of changing capital flows. The inflexibility of fixed ...
Which are preferable and why, fixed, flexible, or a mixture of the two exchange rates?