Forex Case for fixed rates

(1) Promotions of international trade stable exchange rates encourage international trade by providing certainty and confidence. Exports and importers know in advance how much they will receive or they will have to pay in terms of home currency.

Advocates of floating rates point out that the post-war experiences do not support the view that stable exchange rates are required for smooth flow of international trade. Even under flexible rates of exchange international trade will flourish. So long as the balance of payments is at equilibrium , no change in the trade of exchange is expected. When the balance is in disequililbrium , the rate of exchange will change but the change expected can be assessed. Further, the importers and exports can guard themselves against the changes by entering into forward contracts. The facility of forward contracts imparts the necessary as far as the traders are concerned.

(2) Promotions of international investment stable exchange rates promote international investments which are essential for economic development and progress of the underdeveloped countries. Lenders on long-term would be prompted to invest in other countries only when the return of home currency is ensured by stable exchange rates.

The claim that stable exchange rates promote international investment is not borne out by facts. Even under fixed exchange rates it cannot be ensured that the rates will not change over a long period running into decades. The impending fear of the possibility of devaluation of the currency may act as a deterrent factor in international investment. On the other hand, flexible exchange rates adjust the external value of the currency and prevent recurrence of balance of payments crises more effectively. As a result, their effect on the international lending is likely to be beneficial.

(3) Facility of long – range planning firms and the government can draw out. Long-range plans and work towards economic stability and prosperity easily under conditions of stable exchange rates. the stable exchange rates provide the necessary frame work for drafting out such plans under flexible exchange rates, the frequent changes in exchange rates would render determination of the outlay of the plans difficult because every change in exchange rates the outlay would vary.

Proponents of flexible rates argue that under flexible exchange rates the
Adjustment of balance of payments is done painlessly through changes in the rate of exchange with out affecting the domestic prices and income . this helps planning by firms. Further , flexible rates allow freedom to the country in its monetary arrangements. Under fixed rates the monetary policy adopted should be such as to facilitate maintenance of the fixed rates.