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Fixed exchange rate and flexible exchange rate regime

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Discuss the advantages and disadvantages of both a fixed exchange rate regime and a flexible exchange rate regime.

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The expert examines a fixed exchange rate regime and a flexible exchange rate regime. The advantages and disadvantages of both fixed exchange rate regime and a flexible exchange rate regime is determined.

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Fixed exchange rate:

Fixed exchange rates reduce foreign currency risks in international trade and investment transactions. If the exchange rate is fixed and the market is confidently maintained at a certain level, there is no need of market stakeholders for hedging from sudden exchange rate changes. Planning and predicting the process of decision making, exercised by economic authorities, investors and economic entities, is facilitated by economic stability that is often connected with a fixed exchange rate regime.

The choice of a fixed exchange rate regime implies the loss of monetary sovereignty. The fixed exchange rate imposes restrictions to monetary policy.Similar to fiscal policy, monetary policy is subject to the defined fixed parity,due to the impracticality of budget ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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