19 Jun

Does a fixed exchange rate lead to a currency crisis?

Posted by: admin  /  Category: Buy Currency

Hello, I am doing a economics essay about fixed and flexible exchange rates, where it suggests that a fixed exchange rate will lead to a currency crisis, so countries should adopt a flexible exchange rate. Is this true? any online sources would be of great help. Thanks in advance.

There are two ways for a fixed exchange rate to be stable:

1) Very similar economic cycles and growth rates in the two areas that have the fixed rate.
2) Large flows of capital (and labour) between the two economies to make up for any economic imbalance between them.

(3. And also a government willing to spend huge amounts of money foreign reserves or its own currency) to keep the exchange rate fixed when economic factors suggest they are out of balance.)

As for examples, the UK in the ERM. The Japanese Yen trying to stay within a narrow band of the Dollar. The Chinese currency over the last few years should have been increasing in value massively but wasn’t (reason 3).
Also, look at the massive flows of gold between nations when they were tied to the gold standard.

3 Responses to “Does a fixed exchange rate lead to a currency crisis?”

  1. Henry 007 Says:
    June 19th, 2010 at 9:14 am

    not really, who knows, to be honest, a banker or the bank of England even has no idea how to do it, the BOE even can’t expect the exchange rate in future,

    It’s too hard to cope with.
    References :

  2. man290663@btinternet.com Says:
    June 19th, 2010 at 9:25 am

    NOT if the counties have a common banking policy such as the Euro Zone before they converted to the Euro but it did when the UK tried it but without following a FIXED route (it tried to bracket the rate but set it too high) then did NOT follow EuroZone bank rules.

    Flexi exchange rates make currencies open to exploitation and manipulation by traders as maintain a currency so that ITS wanted can cause and economy to collapse and induce inflation etc.

    the smaller currencies SHOULD link together in there own euro zone equivalent then let these BIG groupings float freely then the risk of trader manipulation of currencies will be reduced
    References :

  3. keddaw Says:
    June 19th, 2010 at 9:41 am

    There are two ways for a fixed exchange rate to be stable:

    1) Very similar economic cycles and growth rates in the two areas that have the fixed rate.
    2) Large flows of capital (and labour) between the two economies to make up for any economic imbalance between them.

    (3. And also a government willing to spend huge amounts of money foreign reserves or its own currency) to keep the exchange rate fixed when economic factors suggest they are out of balance.)

    As for examples, the UK in the ERM. The Japanese Yen trying to stay within a narrow band of the Dollar. The Chinese currency over the last few years should have been increasing in value massively but wasn’t (reason 3).
    Also, look at the massive flows of gold between nations when they were tied to the gold standard.
    References :

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