Benefits of Fixed Exchange Rate
Fixed exchange rate is a system where a nation’s government announces what its main currency is going to be worth and it also sets ups all guidelines of exchange. There are lots of gains from a fixed exchange system mainly because the government is in charge of regulating the performance of the currency. Discussed here are benefits of fixed exchange rate.
1. Reduces inflation
Fixed exchange system helps in keeping inflation low and thus prevents the price of good from increasing rapidly, particularly during harsh monetary times. The main point is that when a nation is using the fixed exchange system, they require keeping inflation low so as to prevent the currency from falling below a specific target level. Conversely, in the floating exchange system, countries that experience high inflation merely devalue, and thus there is little anti-inflation restraint.
2. Lowers uncertainty
A nation where the fixed exchange system is used enables companies to plan well ahead since they know the future prices and costs. This fact encourages more investment into the country since firms have better plans concerning the future. In contrast, if you experience quick appreciation in the other floating exchange system, this could make all exports uncompetitive. This would even drive you to bankruptcy because of the instability of the exchange system.
3. Removes automatic adjustments
Fixed exchange systems do not automatically correct payments disequilibrium. Instead, such a system forces the government to undertake correction through increasing interest rates and reducing domestic demand. In consequence, this really restrains the domestic financial polices making sure that they do not focus on inflation and unemployment. In contrast, floating exchange systems liberates the domestic polices, while automatically devaluing the currency, so as to correct external imbalances.
In conclusion, fixed exchange rate offers stability and may even enhance tourism as tourists visiting from other nations can budget beforehand as they know what their money will be worth.