Floating Exchange Rate
Floating Exchange Rate
Exchange rates between currencies have been highly unstable since the collapse of the Bretton Woods system of fixed exchange rates, which lasted from 1946 to 1973. Under the "floating" exchange rates, since 1973, exchange rates are determined by people buying and selling currencies in the foreign-exchange markets . The instability of floating rates has surprised and disappointed many economists and businessmen, who had not expected them to create so much uncertainty.
During the fifties and sixties, however, as stresses built on the system of fixed exchange rates, both economists and policymakers began to see exchange rate flexibility in a more favorable light. In a seminal paper in 1953, Milton Friedman argued that the fear of floating exchange rates was unwarranted. By the late sixties Friedman 's view had become widely accepted within the economics profession and among many businessmen and bankers. Therefore, concern over the instability of floating exchange rates was replaced by an appreciation of the greater flexibility that floating rates would give to macroeconomic policy. The main advantage was that nations could pursue independent monetary policies and adjust easily to eliminate payments imbalances and offset changes in their international competitiveness. This change in attitude helped to prepare the way for the abandonment of fixed rates in 1973.
The instability of rates since 1973 has thus been a severe disappointment. Some of the changes in exchange rates can be attributed to differences in national inflation rates. But yearly changes in exchange rates have been much larger than can be explained by differences in inflation rates or in other variables such as different growth rates in various countries ' money supplies.
Originally expressed in a celebrated 1976 paper by MIT economist Rudiger Dornbusch, is that even without destabilizing speculation, exchange rates will be highly variable because of a phenomenon that he
Exchange rates between currencies have been highly unstable since the collapse of the Bretton Woods system of fixed exchange rates, which lasted from 1946 to 1973. Under the "floating" exchange rates, since 1973, exchange rates are determined by people buying and selling currencies in the foreign-exchange markets . The instability of floating rates has surprised and disappointed many economists and businessmen, who had not expected them to create so much uncertainty.
During the fifties and sixties, however, as stresses built on the system of fixed exchange rates, both economists and policymakers began to see exchange rate flexibility in a more favorable light. In a seminal paper in 1953, Milton Friedman argued that the fear of floating exchange rates was unwarranted. By the late sixties Friedman 's view had become widely accepted within the economics profession and among many businessmen and bankers. Therefore, concern over the instability of floating exchange rates was replaced by an appreciation of the greater flexibility that floating rates would give to macroeconomic policy. The main advantage was that nations could pursue independent monetary policies and adjust easily to eliminate payments imbalances and offset changes in their international competitiveness. This change in attitude helped to prepare the way for the abandonment of fixed rates in 1973.
The instability of rates since 1973 has thus been a severe disappointment. Some of the changes in exchange rates can be attributed to differences in national inflation rates. But yearly changes in exchange rates have been much larger than can be explained by differences in inflation rates or in other variables such as different growth rates in various countries ' money supplies.
Originally expressed in a celebrated 1976 paper by MIT economist Rudiger Dornbusch, is that even without destabilizing speculation, exchange rates will be highly variable because of a phenomenon that he
Bibliography: Krugman, P. (1993). Exchange rates. Retrieved September 6, 2013, from The concise encyclopedia of economics: http://www.econlib.org/library/Enc1/ExchangeRates.html tutor2u. (n.d.). Fixed and floating exchange rate. Retrieved September 06, 2013, from tutor2u: http://www.tutor2u.net/economics/content/topics/exchangerates/fixed_floating.htm