Advantages And Disadvantages Of Floating Exchange Rates

• What is a Floating Exchange Rate?

Floating exchange rate is a regime where the currency price is set by the forex market based on supply and demand compared with other currencies , However in which the government usually determines the rate moreover the breaking down floating exchange rate it means that while long-term and adjustment reflect relative economic strength and interest rate differentiates between countries while short-term reflects speculation and disasters however natural or man-made.

In the Central Bank intervention the floating exchange rate system central bank usually buy or sell the local currencies to adjust the exchange rate moreover there are groups of central banks nations like (Germany , France , Canada , Japan , Italy

The first thing that is it advantage of floating exchange rate is Automatic stabilisation and that’s mean any disequilibrium found in the balance of the payments will be corrected automatically by a change in the exchange rate , for example a country is suffering from a deficit in the balance of the payments then other things being equal then this country currency should depreciate so this can make the exports of the country cheaper and this will lead to increasing in the demand however in the same time if the imports expensive it will decrease the demand and then the balance of the payments equilibrium would be restored . The second thing is the freeing internal policy and by changing the external price of the currency under the floating exchange rate system of the balance of payments however reducing a deficit can be involve general deflationary policy for the whole economy if a country fixed exchange rate policy is adopted , moreover the floating exchange rate makes the government to pursue internal policy like full employment growth finally the absences if crisis is the fixed exchange rate where usually characterised by crisis however too much pressure was piton central bank to devalue the currency of the country and when the central bank devalue

The first thing in the disadvantage of floating exchange rate is uncertainty where the value of currencies changes from day to day moreover the seller will not be sure how much money he will have when he sells goods and the second disadvantage is lack of investment where the foreign investment can be discourage due to the uncertainty introduced by floating exchange moreover the third thing is discipline is speculation where this will encourage speculation movement of money between countries and finally the lack of discipline where short-run problems as domestic can be ignored until have created crisis situation