Fixed versus Flexible Exchange Rates

What are the advantages and disadvantages of fixed exchange rates?

Exchange Rate

Fixed exchange rate: If the government of the country regulates the rates at which its currency is exchanged for other currencies, the system is called fixed exchange rate.

Flexible Exchange Rate: If the government of the country does not interfere in the valuation of its currency in any way, the exchange rate system is called flexible exchange rate.

Advantages of fixed exchange rate: The main arguments advanced in favor of the system of fixed or stable exchange rates are as follows:

1. Promotes International Trade
2. Necessary for Small Nations
3. Promotes International Investment
4. Removes Speculation
5. Necessary for Small Nations
6. Necessary for Developing Countries
7. Suitable for Currency Area
8. Economic Stabilization
9. Not Permanently Fixed

Disadvantages of Fixed Exchange Rates: The main disadvantages of the system of fixed or stable exchange rates are as follows:

1. Discourage Foreign Investment
2. Monetary Dependence
3. Cost-Price Relationship not Reflected
4. Not a Genuinely Fixed System
5. Difficulties of IMF System

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