Floating Exchange Rates: The Only Viable Solution

For some, the collapse of Mexico's economy proves that floating exchange rates
and markets without capital controls are deadly. Others find the crash of the
European exchange-rate mechanism (ERM) in 1993 to be proof that targeted rates
will always be overturned by the free market. Many see the breakup of Bretton
Woods as the failure of fixed rates. Yet others believe monetary unification in
Europe is the only way to achieve economic and political stability. Many others
hold still different beliefs. There are, however, four main proposals for the
management of international currency exchange rates: monetary unification, fixed
rates, floating rates maintained within certain "reasonable" ...

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Monetary System, which virtually collapsed in 1993, was an attempt
to fix exchange rates within certain tight bands, to coordinate monetary policy
between member nations and to have central banks intervene to keep exchange
rates within the bands when necessary. The reasons for the collapse were myriad,
but, simply put, it happened because Germany, dealing with financial problems in
part arising from its reunification, refused to lower its high interest rates.
This meant other European countries either had to keep their rates equally high
and allow themselves to fall into recession as a result, or devalue their
currency against the mark, a move viewed by many as a political embarrassment.
The possibility of a devaluation caused speculators to bolt from the lira, the
pound, the franc and other currencies, sending the markets into chaos and
destroying all semblance of stability. In the end, the ERM was adjusted to allow
currencies to fluctuate within 15 percent on either side of ...

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is its cost?) and politically disastrous (more people
notice high interest rates and unemployment than care about currency stability).
Even if the government were willing to bow to international standards,
nationalism is strong in the world today and most people do not look fondly upon
consolidated global power--witness the problems of the United Nations. People
would not widely support what would effectively be international control of
their country's economic policies and money supply.

Speculators, unfortunately, know that governments today are likely to put their
self-interest ahead of the nebulous common good and to eventually choose the
monetary policy that is best for their ...

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Floating Exchange Rates: The Only Viable Solution. (2007, March 12). Retrieved March 20, 2019, from http://www.essayworld.com/essays/Floating-Exchange-Rates-Only-Viable-Solution/61629
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Added: 3/12/2007 03:50:09 AM
Category: Economics
Type: Premium Paper
Words: 2627
Pages: 10

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