This document discusses and compares fixed and floating exchange rate systems. Under a fixed exchange rate system, a country's currency is pegged to another currency at a fixed rate. This stabilizes currency values but the system is vulnerable to speculation. Most currencies now float freely based on supply and demand. A floating exchange rate allows independent monetary policy and automatic balance of payments adjustments. While no system is definitively better, advanced economies tend to use floating rates while developing economies may benefit more from fixed rates initially.

1. Fixed vs Floating
Exchange Rate
System
By
Pankaj Newar
13A2HP029

2. AGENDA
Fixed Exchange Rates
Benefits
Breakup of Fixed Exchange Rate
Floating Exchange Rate
Benefits

3. Exchange Rates
It is value of one nations currency in
comparison to another
Types:
1) Fixed Exchange Rate
2) Floating Exchange Rate

4. Fixed Exchange Rates
A fixed exchange rate pegs one
country's currency to another country’s
currency
The government of a country doesn’t
let the exchange rate change in
accordance with the demand and
supply for the currency
The purpose of a fixed rate system is
to maintain a country’s currency value
within a very narrow band.

5. Country with Fixed Exchange
Rate
Country Currency Peg Rate Peg Currency
Bermuda Bermuda
Dollar (BMD)
1 USD
UAE Dirham 3.673 USD
Denmark Danish Krone 7.46 EUR
Nepal Rupee 1.6 INR
Latvia Lats (LVL) 0.7028 EUR

6. Benefits
Promote International Trade
Helpful for Small Nations
Restricts Speculation
Major Crisis
Mexican Peso Crisis, 1994
Asian Currency Crisis, 1997

7. Breakup of Fixed Exchange
Rate
Macroeconomic Policy Package of
1965-1968 i.e.,
1) Finance Vietnam Conflicts
2) Own welfare programs
 In August 1971, US President
announced that dollar was no longer
convertible into gold
 By March 1973, most of the currency
began to float against each other

8. Floating Exchange Rate
System
A country's exchange rate regime
where its currency is set by the
foreign-exchange market through
supply and demand for that particular
currency relative to other currencies.
Most widely traded currencies: US
dollar, Euro, Japanese Yen, British
pound & Australian Dollar

9. Benefits
 Automatic BOP adjustments
 Independent Monetary Policy
 Promotes Economic Development
 Increase in Liquidity

10. Conclusion
There is no right answer for which
exhange rate is better
Advanced Economy: Floating Rate
Emerging Economy: May gain from
floating rate
Underdeveloped Economy: Fixed
Rate