Floating and fixed exchange rate.doc

Floating and fixed exchange rateWhich is better？If one country want to conduct international payments ,and pay off the balance of payments is sure to bound its national currency and the currencies of other countries. linked to the sum of national internal and external environment into the mouth of factors, as well as government control of the country a combination of factors such as the formation of a separate currency exchange the ratio of a countrys currency, which is called the exchange rate parity. The exchange rate in economic and financial system have played an enormous role, through the supply of foreign exchange impact of a countrys currency supply and demand, and thus the countrys imports and exports, the price level and the international balance of payments, international trade and international financial markets, a significant impact. According to the evolution of division of the international monetary system, with fixed exchange rates and floating exchange rate. A fixed exchange rate refers to the formulation of the exchange rate in monetary gold content, based on a fixed ratio between the formation of the exchange rate. This has worked out the exchange rate or by the input and output of gold to be adjusted, or the monetary authority control under the fluctuations within the statutory range, and therefore relatively stable. A floating exchange rate refers to a countrys currency with his countrys currency exchange rate fluctuations is not upper and lower limits, but by supply and demand in the foreign exchange market to decide. Floating exchange rate system in accordance with whether the State intervention in the foreign exchange market can be divided into free-floating exchange rate system (also known as clean floating exchange rate system) and the managed floating exchange rate system (also known as dirty floating exchange rate system). In fact, today no international implementation of a completely free-floating, while the major developed countries have varying degrees of foreign exchange market intervention. The current managed floating exchange rate system in various forms, can be divided into separate and joint floating floating, while others are pegged to the policy of floating exchange rate system. In general, the fixed exchange rates and floating exchange rates have their own advantages and disadvantages. The benefits of fixed exchange rate is to eliminate exchange rate risk, lowering of international trade and investment transaction costs. For their own monetary policy restrictions, making the currency interest rates and inflation rates with major international currencies and inflation will not be no reason to differ too much, will help create a relatively stable and predictable macroeconomic environment. However, the fixed exchange rate also has its problems, when the international balance of payments deficit, it can not in a timely manner through the exchange rate automatically to achieve a balance of international payments, but often caused the countrys foreign exchange outflow of large quantities of gold and international reserves declined significantly. In addition, a fixed exchange rate system would be in the international transmission of inflation under a fixed exchange rate system, through currency adjustments will not be able to slow inflation and deflationary pressures. Thus the advantages of floating exchange rates in the country provides an independent monetary policy instrument to control inflation; to prevent the impact of international idle funds, to avoid the outbreak of the currency crisis; are conducive to promoting the growth of international trade and production development; are conducive to the promotion of capital flows. But the drawback is that often resulted in fluctuations in the foreign exchange market is not conducive to long-term international trade and international investment purposes; not conducive to the stability of international financial markets; could lead to competitive devaluations, more disadvantageous to developing countries. From a historical point of view of the practice of the development process, since the mid to late 19th century, established the gold standard in Western countries, has been to 1973, the worlds exchange rate system is essentially a fixed exchange rate regime, from 1816 to World War II former international gold standard during the fixed exchange rate system; and from 1944 to 1973 of the Bretton Woods system of fixed exchange rate system. From the 1973 International began widespread use of a floating exchange rate system. 1.Under the gold standard system of fixed exchange rate system During 1880-1914 years, 35 years, the major Western countries access the gold standard, its currency exchange rate is determined by the mint parity; because gold free casting, bank notes can be freely convertible gold coins, gold can freely input-output, the exchange rate by the transport point of gold restrictions, fluctuations confined to a very narrow range, it can be said that the gold standard system of fixed exchange rate system is typical of a fixed exchange rate system. As the gold delivery point constraints, gold-based system eliminates the existence of bimetallism the price under the chaos and the shortcomings of currency instability to ensure the currency in circulation, gold metal on the base currency devaluation does not occur to ensure the unity of the world market and foreign exchange going-rate of relative stability, is a relatively stable monetary system. However, as a pre-war national productivity due to the Industrial Revolution triggered a revolution, the growth rate of gold production is far below the growth rate of production of commodities, gold can not meet the needs of the growing circulation of commodities, which greatly weakened the gold coin flow basis. The end of World War I broke out, gold was belligerent focus for the purchase of arms and to stop the free cash output and bank notes is a leading direct cause of the collapse of the gold standard. Thus, to the gold standard as the fundamental fixed exchange rate system because of the scarcity of gold and commodities magnification of conflicting constraints is difficult to ensure that the international financial system stability. With the global economy, the systems flaws more apparent. 2. Under the Bretton Woods system of fixed exchange rate system The essence of the Bretton Woods system, to establish a dollar-centric international monetary system. Its basic content is linked to the dollar and gold in other countrys currency peg to the dollar, fixed exchange rate system. Compared to the gold standard, the Bretton Woods system of international exchange rate system, apart from the establishment of a stable exchange rate effects, with strong economic strength and ample gold reserves the United States through a gift, credit, purchase of foreign goods and services and other forms of dissemination to the world a large number of U.S. dollars, objectively speaking, the expansion of world purchasing power played a role, basically solved the scarcity of gold triggered the conflict. Under the Bretton Woods system of fixed exchange rate system there are also a fatal flaw: the existence of the Bretton Woods system can not overcome its own internal contradictions: As the U.S. dollar was pegged to gold, while the other countrys currency peg to the dollar, the U.S. dollar although the reason has achieved the status of international core currency, but countries in order to develop international trade, must be settled with the U.S. dollar as reserve currency, this would lead to outflow of U.S. currency abroad continue to precipitation, for the United States trade deficit occurs when a long-term; and U.S. dollars as an international currency the core premise is to maintain stability and strong U.S. dollar, which in turn asked the United States to be a long-term deficit. These two conflicting demands, it is a paradox. This is the famous Triffin dilemma. The fundamental flaw in the monetary system is the dollar linked to the principle of double identity and double, which led to the systemic crisis of the convertibility of the dollar crisis, or the people against the U.S. dollar convertibility crisis of confidence. Thus, in 1973 the U.S. broke out in the most serious economic crisis, the dollar crisis, the collapse of the system stack to make. Problem pointed out the modern international economic life of gold and credit money irreconcilable conflict between the achieved level of the sharp. As a combination of gold and credit money, under a fixed exchange rate system implies scarcity of gold, the national currency with the contradiction between the international monetary, exchange rate controls led to the monetary value of internal and external value of out of line, balance of payments imbalances and many other issues and contradictions in the role, so that this system still exists room for adjustment. 3. Jamaica, under the system of floating exchange rate system The main elements of the agreement are: a floating exchange rate regime reform, the official confirmed the legalization of a floating exchange rate system, recognizing a fixed exchange rate system and the coexistence of a floating exchange rate system can be free to choose exchange rate system; the introduction of non-monetary gold to make gold out of the International Monetary decisions; reserve currency diversification Jamaica, under a wide range of reserve system, the structure out of national currencies under the Bretton Woods system, the relationship between the stiffness for the international economy provides a wide range of settlement currencies, in large extent, solve the shortage of reserve currencies contradictions; diverse exchange rate arrangements adapted to the diverse and different levels of development of national economies, in order to sustain economic development and stability of the country provides the flexibility and independence, while helping to maintain domestic economic policy continuity and stability; However, in the Jamaica system, in 1973 after the implementation of floating exchange rates generally, the Western foreign exchange market currency exchange rate fluctuations, frequent ups and downs of gold, small crises, big crises occur, the financial crisis more widespread. This reflects the Floating exchange rate system, leading to instability, leading to turmoil in financial markets, increased foreign exchange risk, and thus to some extent inhibit international trade and international investment. Throughout history, whether it is a fixed exchange rate system or a floating exchange rate system, have their own little bit and defects, are in practice the process of continuous setbacks and adjustments, in the long run, a fixed exchange rate system, although a recent controlled to ensure the exchange rate But long-term accumulation of domestic purchasing power can not correctly reflect the value of the currency mismatch between the internal and external contradictions accumulated by a burst could be a huge financial crisis; the same time, each time a floating exchange rate fluctuations triggered by the r