Fixed Exchange Rate

1. NIJIL C V
FIXED EXCHANGE RATE

2. FIXED EXCHANGE RATE
Officials commit to maintaining the exchange rate at
a specific level.

3. Definition of 'Fixed Exchange Rate'
A country's exchange rate regime under which the
government or central bank ties the official exchange rate to
another country's currency (or the price of gold). The purpose
of a fixed exchange rate system is to maintain a country's
currency value within a very narrow band. Also known as
pegged exchange rate.
Fixed rates provide greater certainty for exporters and
importers. This also helps the government maintain low
inflation, which in the long run should keep interest rates down
and stimulate increased trade and investment.

4. • In the past all currencies were fixed to gold.
• Today, a country can fix its value to another country’s
currency.
• A country can fix its currency to a basket of other
currencies.
• To buy or sell foreign currencies a govt must have
foreign exchange reserves.

5. • Govt changing the exchange rates of its
currency in order to promote export volume.
• Fixed exchange rate are govt controlled.
• Govt always preferred the improved business
climate of fixed rates.
They reduces the uncertainty of unstable
currency values (eg: european monetary
system fixed rates of the 1990’s)

6. TIME LINE
• 1880–1914 Classical gold standard period
• April 1925 United Kingdom returns to gold standard
• October 1929 United States stock market crashes
• September 1931 United Kingdom abandons gold
standard
• July 1944 Bretton Woods conference
• March 1947 International Monetary Fund comes into
being
• August 1971 United States suspends convertibility of
dollar into gold – Bretton Woods system collapses

7. • December 1971 Smithsonian Agreement
• March 1972 European snake with 2.25% band of
fluctuation allowed
• March 1973 Managed float regime comes into being
• April 1978 Jamaica Accords take effect
• September 1985 Plaza accord
• September 1992 United Kingdom
and Italy abandon Exchange Rate Mechanism (ERM)
• August 1993 European Monetary System allows ±15%
fluctuation in exchange rates

8. NEED OF FIXED RATE
1. Simplicity and clarity of exchange rate target.
2. Automatic rule for the conduct of monetary policy.
3. Keep inflation under control.
4. Give central banks more credibility.
5. Reduces volatility & sharp fluctuations in relative
prices.
6. Eliminate exchange rate risk.
7. Good for exports.
8. It may minimize instabilities in real economies
activity.
9. Imposes discipline on the monetary authority.

9. REASON FOR CANCEL
1. Loss of independent monetary policy.
2. Vulnerable to speculative attacks.
3. Can be expensive or even impossible to hold.
4. Black markets will emerge.
5. Does not reflect the true value of the currency.
6. Under/over valuation can build up & eventually lead
to currency crisis.
7. The announced exchange rate may not coincide with
the market equilibrium exchange rate, thus leading
to excess demand or excess supply.
8. There exists the possibility of policy delays &
mistakes in achieving external balance.