Exchange Rate Systems

Exchange Rate Systems

  • Submitted By: reiker
  • Date Submitted: 02/06/2011 9:48 PM
  • Category: Business
  • Words: 1642
  • Page: 7
  • Views: 362

There are four main types of exchange rate systems, which are classified by how much government intervention is involved. The four types are fixed, freely floating, managed float and pegged. In a fixed exchange rate system, exchange rates are held at, or very near, a constant rate. This is beneficial to many entities. International companies are able to do business without worrying that their foreign earnings would be devalued, thus making management’s job a little easier. Also the country would be more attractive to foreign investors because investors would be more confident that their profits would be eaten up by the new exchange rate. More investment is also good for the government because investors are needed to support economic growth. Countries with large amounts of capital flows typically have lower interest rates, which can stimulate the economy.

From 1944 to 1971 most countries had a fixed exchange rate system due to the Bretton Woods Agreement. The goal of the Bretton Woods Conference was to avoid the economic problems of the 1930s. The outcome of the conference was countries were to maintain their exchanges in a narrow range around a fixed value based off the value of gold. Two organizations were also established: the International Monetary Fund, which addresses temporary imbalances in payments and the International Bank for Reconstruction and Development, which is now the chief agency of the World Bank Group. On August 15, 1971 President Nixon unhitched the value of the dollar from the value of gold due to increased inflation, and trade and budget deficits. This issued in the era of floating currencies. (NYTimes)

In December 1971 a revision to the Bretton Woods Agreement was signed. It was called the Smithsonian Agreement because it was signed at the Smithsonian Institute in Washington, D.C. The agreement set out to maintain fixed exchange rates but with more fluctuation allowed and not tied to gold. Under the Bretton Woods Agreement a 1...

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