Flexible Exchange Rates

Hello
today me going to copy and paste again from economics textbook
it is ok if you dun understand wat i am saying, becoz even i myself also dun understand LOL.warning going to boring. doesnt matters anyway coz i got no readers, seems like everyone are more interested in gary or gutter blog.

Currently almost all the major currecncy is mostly on dirty float regime. today i am going to talk abt the pro and cons of flexible exchange rates.

Pros
Better adjustments.
flexible exchange rates provide a less painful adjusting to trade imbalance than fixed exchange rates. for example, a deficit with flexible rates will only cause a decline in the foreign exchange value of the currency, but for a fixed rates there will be a recession to reduce income or prices. For political and social reasons, it may be impractical to reduce local currency wages, so instead it is better to lower the value of the national currency. not to mention lowering currency also results in
cheaper exports.

Better Confidence
Flexible exchange rates precent a country from having large deficits, there will be more condidence in the country and the international financial system

Better Liquidity
do not require central banks to hold foreign exchange reserves since there is no need to intervene in the foreign exchange market. insifficient liquidity does not exist with turely flexible rates, and competitive devalieations to have large stocks
of reverves will not take place.

Gains from Freer Trade
tariffs and restrictions are needed when there is deficits with fixed exchange rates. flexible rates avoid the need for these regulations, which are costly to enfore. gains from trade and international investment can be enjoy

Avoid Peso Problem
during 1980s, Mexico fought to keep peso fixed to the USD. to discourage investors from withdrawing funds from mexico, mexico maintain high interests rates. These high rates were the consequence of fixed exchange rates and stifled invesment and job creations. the problem of high interest rates due to delayed devaluation with fixed exchange rates became know as peso problem

Increased independence of policy
Maintaining a fixed exchange rates can force a country to follow the same economics policy as its major trading partners. for example if Canadian were fixed to USD, a deficit in the US will means a surplus in Canada, upwards presure in CANADA and forcing canada to sell canadian dollars and hence increae the canadian money supply.



Here are some arguments against flexible exchange rates

if exports and importers do not know the future exchange rates, they will stick to local markets. this means less international tradeing and overseas investment.

to counter this argument
- flexible rates do not fluctuate wilding, fixed rates do change, often dramatically.
- even if flexible rates are more volatile than fixed exchange rates, there are serval inexpensive ways of avoiding unexpected changes.

under flexible exchange rates, speulators will cause wide swings. these swings are the results of hot money in response to news.
to cause destablization, speculators will have to buy when its high make it go higher and sell when its low to make it lower. this means to buy high and sell low which is a sure recipe for losses.

speculations with fixed rates is destabilizing and profitable. with fixed rates speculators know which direction the rate will move.