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Compose a 2000 words assignment on are fixed exchange rates compatible with free capital flows. Needs to be plagiarism free!
Compose a 2000 words assignment on are fixed exchange rates compatible with free capital flows. Needs to be plagiarism free! In the case of China, the country has a fixed exchange rate and allows central bank to respond to domestic inflations but the capital market flows are kept under control. In the case of the US, Britain and China have an independent monetary policy and capital flows but the exchange rate cannot be kept at a fixed level. (Carbaugh, 2008, p.465. Grey, n.d., p.34)
The impact on the emerging economies on the 1990’s with the onset of liberalization had similar effects. A high level of interest rates and a pegged exchange rate lured foreign investment in Latin America, east of Asia and Russia. The result was very optimistic about the stock market booming and financing of countries' deficit accounts. However, during recent years there was a reversal in the situations. Subsequently, a massive volume of wealth was flown out of the country. The economies were compelled to get rid of the pegged exchange rate system and float their currencies. In some cases like Brazil and Russia financial imbalances worsened the situation. Even a small change in foreign capital index result in a large swing in capital inflow and result the economy enter the vicious circle.
This paper aims to understand the relationship between the exchange rate, currency crisis, and capital flows. The lesson’s learned during the ’90s from emerging economies like Mexico, East Asia, Brazil, and Russia. This article is segregated into the following four segments. (Edward, 2001, pp.1-3)
The economic analysts had to rethink their views on exchange rate policies. In order to prevent the same in the future country should opt for freely floating exchange systems. A fixed exchange rate limits the scope of macroeconomic activity in a country. Unlike, the flexible exchange rate system no combinations of GDP and interest rates are available. So, the economies had lesser options to combat inflationary fluctuations. Though Mexico had a painful experience in the 1990s, the analyst had still supported the pegged or quasi pegged rates. The 5 East Asian countries that gradually .entered into crisis in 1997 had pegged exchange rates with the US dollar.
