Floating exchange ratesThe floating exchange rate refers to the exchange rate of a country's currency for other currencies**, which is freely determined according to the supply and demand situation of the foreign exchange market, and does not fix the fluctuation range of the exchange rate.
In 1971, the United States implemented the New Economic Policy, allowing the US dollar exchange rate to float freely, and by 1973, the floating exchange rate system was widely implemented in various countries. Since then, the foreign exchange market has continued to evolve as the exchange rates of various countries continue to fluctuate.
The main factors affecting the exchange rate under the floating exchange rate system are: the value of the currency itself, the balance of payments of a country, the interest rate, the intervention of the foreign exchange market by the ** and ** banks of various countries, politics, psychology, speculation and other factors.
In real life, there are hardly any countries that do not intervene in the exchange rate of their national currencies at all, or that completely adopt a free-floating exchange rate.
Since the exchange rate has a significant impact on the country's balance of payments and economic equilibrium, most countries control the direction of the exchange rate by adjusting interest rates, buying and selling foreign exchange in the foreign exchange market, and controlling the movement of capital.
Fixed exchange rateA fixed exchange rate refers to the fact that the exchange rate between one country's currency and another country's currency is basically fixed, not that the exchange rate is completely fixed, but fluctuates around a relatively fixed upper and lower limit of parity.
After World War II, a fixed exchange rate system centered on the US dollar was established, and the International Monetary Organization stipulated that the currency parity of member countries should be expressed in a certain amount of ** or US dollars, and the currency exchange rate of member countries could only be floated within a certain range of upper and lower limits of 1 according to the rate of **parity.
When the exchange rate of a country's currency against the US dollar fluctuates beyond this range, the official obligation of that country is to limit the exchange rate fluctuation to the prescribed upper and lower limits.
The main advantages and disadvantages of a fixed exchange rate
A fixed exchange rate is conducive to the development of the world economy.
Because the fixed exchange rate system means that the exchange rate between the two currencies is basically fixed, or the exchange rate fluctuation range is limited to a certain range. It is convenient for economic entities operating international**, international credit and international inputs to carry out cost and profit accounting, and also makes the economic entities that carry out these international economic transactions face less risk of exchange rate fluctuations.
The disadvantage is that the exchange rate is basically unable to play an economic role in adjusting the balance of payments。A fixed exchange rate system is likely to cause an imbalance in internal equilibrium, as it does not reflect the supply and demand of foreign exchange flexibly, thus losing or weakening the marketability of the exchange rate.
The loss or weakening of the marketability of the exchange rate makes it unable to adjust the supply and demand relationship of foreign exchange in turn, and the automatic adjustment function is greatly reduced, so it can only be adjusted by the first class.
The main advantages and disadvantages of floating exchange rates
The main advantages of the floating exchange rate system are that it prevents international postage shocks, avoids currency crises, and is conducive to promoting the development of international production and capital flows.
As long as the imbalance in the balance of payments is not particularly serious, there is no need to adjust fiscal and monetary policies, reduce the need for reserves, and enable deficit countries to avoid losing reserves.
The main disadvantage of floating exchange rates is that they often lead to fluctuations in the foreign exchange market, which is not conducive to the long-term internationalization and international investment, and is not conducive to the stability of the financial market.
In addition, exchange rate monitoring is ineffective, and the imbalance in the balance of payments remains unresolved, which is even more detrimental to developing countries. Because of the frequent and violent fluctuations in the exchange rate, it is difficult for international credit, international input, and the international** economy to account for costs and profits.
In addition, it fuels foreign exchange speculation and can exacerbate the turbulence and chaos in the international financial markets.
SummaryFloating exchange rates
It refers to the exchange of a country's currency for other currencies**, which is freely determined according to the supply and demand conditions of the foreign exchange market, and does not fix the fluctuation range of the exchange rate.
Advantages: Prevent international postage shocks, avoid currency crises, and help promote the development of international ** and production, but also promote capital flows and so on.
Disadvantages: It often leads to fluctuations in the foreign exchange market, which is not conducive to the long-term international investment and international investment, and is not conducive to the stability of the financial market.
Fixed exchange rate
It refers to the fact that the exchange rate between one country's currency and another country's currency is basically fixed, fluctuating around a relatively fixed upper and lower limit of parity.
Advantages: The fixed exchange rate system is that the comparison of the currencies of the two countries is basically fixed, or the range of exchange rate fluctuations is limited to a certain range, and the economic entities that carry out international economic transactions face less risk losses in exchange rate fluctuations.
Disadvantages: basically can not play the role of economic leverage in adjusting the balance of payments, the fixed exchange rate system is likely to cause internal balance imbalance, can not in turn adjust the supply and demand of foreign exchange, the automatic adjustment function is reduced, can only be adjusted by the first.
Exchange rate