Exchange Rate regime

1. Fixed vs Floating
Exchange Rate
System
By
Pankaj Newar
13A2HP029

2. AGENDA
Fixed Exchange Rates
Benefits
Breakup of Fixed Exchange Rate
Floating Exchange Rate
Benefits

3. Exchange Rates
It is value of one nations currency in
comparison to another
Types:
1) Fixed Exchange Rate
2) Floating Exchange Rate

4. Fixed Exchange Rates
A fixed exchange rate pegs one
country's currency to another country’s
currency
The government of a country doesn’t
let the exchange rate change in
accordance with the demand and
supply for the currency
The purpose of a fixed rate system is
to maintain a country’s currency value
within a very narrow band.

5. Country with Fixed Exchange
Rate
Country Currency Peg Rate Peg Currency
Bermuda Bermuda
Dollar (BMD)
1 USD
UAE Dirham 3.673 USD
Denmark Danish Krone 7.46 EUR
Nepal Rupee 1.6 INR
Latvia Lats (LVL) 0.7028 EUR

6. Benefits
Promote International Trade
Helpful for Small Nations
Restricts Speculation
Major Crisis
Mexican Peso Crisis, 1994
Asian Currency Crisis, 1997

7. Breakup of Fixed Exchange
Rate
Macroeconomic Policy Package of
1965-1968 i.e.,
1) Finance Vietnam Conflicts
2) Own welfare programs
 In August 1971, US President
announced that dollar was no longer
convertible into gold
 By March 1973, most of the currency
began to float against each other

8. Floating Exchange Rate
System
A country's exchange rate regime
where its currency is set by the
foreign-exchange market through
supply and demand for that particular
currency relative to other currencies.
Most widely traded currencies: US
dollar, Euro, Japanese Yen, British
pound & Australian Dollar

9. Benefits
 Automatic BOP adjustments
 Independent Monetary Policy
 Promotes Economic Development
 Increase in Liquidity

10. Conclusion
There is no right answer for which
exhange rate is better
Advanced Economy: Floating Rate
Emerging Economy: May gain from
floating rate
Underdeveloped Economy: Fixed
Rate