Fixed Exchange Rates
Countries following the fixed exchange rate (also known as stable exchange rate and
pegged exchange rate) system agree to keep their currencies. at a fixed, pegged rate and to change their value only at  fairly infrequent intervals, when the economic situation forces them to do so.
Under the gold standard, the values of currencies were fixed in terms of gold. Until the breakdown of the Bretton Woods System in the early 1970, each member country of the IMF defined the value of its currency in terms of gold or the US dollar and agreed to
maintain (to peg) the market value of its currency within:!: I per cent of the defined
(par) value. Following, the breakdown of the Bretton Woods System, some countries
took to managed floating of their currencies while a number of countries still embraced the fixed exchange rate system.
Advantages of Fixed Exchange Rate System
•  The relative merits and demerits of the fixed and flexible exchange rate systems have long been a topic for debate. A number of arguments have been put forward for  and against each  system. The important arguments  supporting the  stable exchange rate system:
•  Exchange rate  stability  is  necessary  for  orderly development and  growth of foreign If exchange rate stability is not assured, exporters will be uncertain about the amount they will receive and importers will be uncertain about the amount they will have to pay. Such uncertainties and the associated risks adversely affect foreign trade.  A great advantage of the fixed exchange rate system is that it eliminates the possibilities of such uncertainties and risks.
•  Especially the developing countries, which have a persistant balance of payment deficits, should necessarily adopt the stable exchange rate sys.
•  Exchange  rate  stability  is  necessary  to  attract  foreign  capital  investment  as foreigners will not be interested to invest in a country with an unstable currency. Thus,  exchange  rate  stability  is  necessary  to  augment  resources  and  foster economic growth.
•  Unstable exchange rates  may  encourage the  flight of  capital.  Exchange  rate stability is necessary to prevent its outflow.
•  A stable exchange rate system eliminates speculation in the foreign exchange market.
•  A  stable  exchange  rate  system  is  a  necessary  condition  for  the  successful functioning of regional groupings and arrangements among nations.
•  Foreign trade plays a very important role in case of a number of countries. As we have seen in the first chapter,  for certain countries, the value ,of foreign trade exceeds GNP, while for others, the value of foreign trade is more than 50 percent of their GNP. Exchange rate stability is especially important for such countries to ensure the  smooth functioning of the economy. Its absence will give rise to uncertainties and this would disturb the  foreign trade sector and, thereby, the economy.
•  A stable exchange rate system is also necessary for the growth of international money and capital markets.  Due to the uncertainties associated with unstable exchange rates, individuals, firms and institutions may shy away from lending to and borrowing from. the international money and capital markets.
Disadvantages of Fixed Exchange Rate System:
Fixed Exchange Rate has a great flaw in those countries with a large and persistent Balance of Payment deficits were losing gold and other foreign assets. This could not go on forever. Hence USA abandoned this system. The other countries facing problems of payment deficit found their international reserves dwindling, which forced them, devalue their currency, which had an inflationary potential.
Another problem was the question as to what level exchange rate system should be fixed. The exchange rate would normally be fixed at an equilibrium level but it is difficult for government to find that level where demand equals quantity supplied.
Further even if the exchange rate of foreign currency is fixed, it shall give another host of problems. That is if the foreign rate is fixed at a lower level there shall be a deficit in the BOP. And if it is fixed at a higher level there shall be a surplus in the BOP.
Therefore in view of the above drawbacks and problems, the  fixed exchange rate system has been given up despite its various advantages mentioned above.
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