Economics

Economics

Economics

1. The interrelationship between the exchange rate regime and viability of the alternative approaches to resolving a balance of payments crisis

Straddling the financial economy and the real economy of goods and services, the exchange rate of a currency is a good indicator of the strength, stability and productivity of an economy and the value of its financial securities. Fluctuations in exchange rates can have a real effect on individuals and businesses. If the exchange rate falls, the level of debt denominated in foreign currencies and increased the price of imports increases. All imported goods used in domestic production becomes more expensive, which increases the price of goods produced and can lead to inflation. If the government raises interest rates to fight inflation, it will tumble in output and employment.

The exchange rate regime chosen by a government may have important consequences for the whole economy. If he opts for a properly structured plan, the country will benefit from increased stability, because the exchange rate is the indicator that directs the flow of international capital to the most productive uses. If he chooses a system ill-suited to its needs, there may be instability and currency crisis and general financial crisis, as happened recently in Asia.

The factor that is normally used to determine the exchange rate regime is the vulnerability to external shocks. In case of external shock, the system of floating exchange rates allow the necessary adjustments, while in regime fixed exchange rate, it is wages and prices will adjust. According to economic theory, small open economies should set their rates, while the rate of major countries should float.The exchange rate regime is particularly important for developing countries. In a country whose financial sector is underdeveloped and whose securities are not diversified, the exchange rate for investors is the main indicator of price. Therefore, very marked fluctuations in the exchange rate more investors destabilize the case of an emerging economy that it is a better economic footing.

However, exchange rates are almost never the same as their par value. In terms of international trade and other foreign shares ratio of receipts and payments in foreign currency and, accordingly, demand and supply of foreign currency is not in equilibrium. With the active balance of payments of foreign exchange rates in the currency market of the country are falling, and the rate of national currency increases. The converse happens when a country has a passive balance of payments. Because in most countries, together with a firm official exchange rate of national currency, there is also free. According to the official parity, the settlements of national central banks and other monetary and financial institutions across countries and with international organizations. Payments between private individuals and organizations are carried out on a free course. If this balance is passive, then its demand for foreign exchange exceeds supply and the rate of its currency will fall below the mint parity. In contrast, when the country has an active balance of payments, then the demand for foreign ...