Advantages
- A fixed exchange rate may minimize instabilities in real economic activity
- Central banks can acquire credibility by fixing their country's currency to that of a more disciplined nation
- On a microeconomic level, a country with poorly developed or illiquid money markets may fix their exchange rates to provide its residents with a synthetic money market with the liquidity of the markets of the country that provides the vehicle currency
- A fixed exchange rate reduces volatility and fluctuations in relative prices
- It eliminates exchange rate risk by reducing the associated uncertainty
- It imposes discipline on the monetary authority
- International trade and investment flows between countries are facilitated
- Speculation in the currency markets is likely to be less destabilizing under a fixed exchange rate system than it is in a flexible one, since it does not amplify fluctuations resulting from business cycles
- Fixed exchange rates impose a price discipline on nations with higher inflation rates than the rest of the world, as such a nation is likely to face persistent deficits in its balance of payments and loss of reserves
Read more about this topic: Fixed Exchange-rate System
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