Advantages and Disadvantages of Fixed and Floating Ex Rates

Advantages of Fixed Ex Rate

1) Gov can set the 'best' exchange rate that maximises the performance of the economy

2) The govt can fix the exchange rate as a stepping stone to joining Euro and having a joint monetary with EU countries

3) There is more certainty about future profits for firms and thus more investment

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1) The govt cannot have a monetary policy of fixing interest rates to maximise the economy's performance

2) A fixed exchange rate will no make sure that the BOP is always moving towards an equilibrium - long term deficits and surpluses on the BOP

3) The govt or BOP may have to use large amounts of foreign currency to keep the exchange rate fixed

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1) The govt cannot fix the exchange rate to help improve macro performance

2) Firms face uncertainty over their future profits and thus less likely to invest

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1) The govt can have a monetary policy of using interest rates to improve the economy's performance

2) A floating exchange rate will make sure that the BOP always moves towards equilibrium. There won't be large, permanent BOP deficits/surpluses

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