INTERNATIONAL FINANCIAL SYSTEMS

International Financial Systems



International Financial Systems

Introduction

Governments have generally shown a preference for international financial systems featuring Fixed Exchange rates. In this paper, it will be discussed that how Floating Exchange Rates favour Private investors. Addition to this How Euro zone limited the scope of the two Governments of Greece and Ireland to respond financial issues and its consequences.

Exchange rate

Exchange rate is the price (quote) of the currency of one country, denominated in the currency of another country, precious metals, and securities. The concept of "exchange" is due to its characteristics such as convertibility (Philip, Sharmila, 2009, pp.23-29).

Fixed exchange rate

The euro and the dollar are the currencies of reference used for fixed exchange rates. On the map, the countries with currencies fixed to the euro and the dollar violet yellow.

A fixed exchange rate is the exchange rate regime of a currency whose value is adjusted according to the value of another currency of reference.

A fixed exchange rate stabilizes the value of a currency against which it is attached. This facilitates trade and investment between countries with currencies linked and is very useful for small economies, where foreign trade is a major part of GDP.

In certain situations, fixed exchange rates may be preferred for its stability: for example, the Asian financial crisis was less severe due to the fixed exchange rate of Chinese yuan. After the economic devastation of World War II, the system of Bretton Woods allowed Western Europe to recover from a stable exchange rate fixed to the U.S. dollar until 1970 (Madeleine, 2005, pp.125-127).

Floating Exchange Rate

Floating exchange rates are allowed to exist when the exchange rates are adjusted according to the deficit or surplus, without intervention from any country. If a country experiences a surplus, the currency demand exceeds supply, so the value of that currency (or exchange rate) will increase. If a country suffers a deficit, the opposite will happen: the value of that currency will decline.

The exchange rates between the dollar, yen, pound sterling and the euro may change as the needs of buyers and sellers of these coins. This is a floating exchange rate, that there is more or less since 1971.

Determinants of Floating Exchange Rate

The determinants of exchange rate flexibility are the demand and supply of a currency, especially those dependent on flows of goods and currencies. The changes in flows of goods (and therefore the exchange rate) are due to changes in relative prices, relative income levels, preferences and relative inflation rates in those countries. Speculation also affects floating exchange rates.

The yen rose in value between 1982 and 1988 because there were more buyers of yen (to pay for imports from Japan such as cars and electronics) that sellers of yen (income from export to Japan, such as aircraft and agricultural products). One of the reasons for the greater number of American imports from Japan is the craving of American society (Laffan, 2004, pp. 75-96).

Disadvantages of Floating Exchange Rate

The main disadvantages of floating exchange rate are:

Uncertainty about future changes in exchange ...