1/9/2020 0 Comments
Some Issues of Global Finance - Assignment Example Normally, there are no risks of exchange rate crises and the system does not need government intervention in achieving the outcomes. They are normally variable since sometimes bandwagons and other speculative behavior drives and determines demand. It can also be so because exchange rates sometimes overshoot their long-run values.Â The market corrects the rate automatically reflecting inflation and other market conditions influencing the economy.Â Crawling peg: In this system, a currency links its value to another but gives it fluctuation limits and is immensely valuable if a currency linking itself has expectations of being volatile exceptionally, hence allowing itself to fluctuate to a level acceptable under the conditions. In this system, the authorities determine the value around which the currency can fluctuate.Â Fixed exchange rate system. Here, the currency has direct convertibility towards another currency with the government trying to keep the value constant against the other currency. The government decrees the worth of its currency against the value of another, plus rules of the exchange. - Advantages and disadvantages of the Floating rate exchange system.Â - Advantages. Flexibility, which enhances the capability of the country market economy to pick up and adjust quickly to the changing market conditions, is the main advantage of this system.Â In case of a violation of the balance of payments deficit, this system of exchange allows for adjustment of outflow and/or inflow making either domestic or foreign goods more competitive depending on whether there was appreciation or depreciation in the currency market. Another advantage is the automatic determination of interest rates within the country, allowing efficient control of the economic balance. A country gets insulated from unemployment problems in other countries. This is because currency exchange rate adjustments normally serve as protection against the exportation of financial problems to other countries.Â - Disadvantages. This system does not stimulate trade development and production, hence leading to market instability. Further, it destabilizes the financial situations and leads to economic crises. This causes uncertainty in trade; it may be uncertain to entrepreneurs the amount of money they get by selling their goods abroad or their prices in foreign countries. Likewise, importation will be uncertain since they may never know the cost of importing foreign goods. Another disadvantage is that the uncertainty it causes may discourage investment either internally or externally.Â Additionally, it leads to speculation which is a serious economic destabilization since the speculative flows may contradict the trade flow patterns.