Tuesday, March 31, 2009

Do Fixed or flexible Exchange rates provide for greater "discipline" on the part of policymakers?(3)

Two major replies can be made to these points .first,with respect to the vicious circle hypothesis ,flexible-rate advocates think that the depreciation that was a response to the inflation and that is alleged to cause further inflation can actually be clear signal to the authorities that monetary restraint is needed .This signal can therefore lead to the quick instigation of anti-inflationary policies.thus,in this view,the danger of inflation is no greater under flexible than under fixed rates.
In response to the alleged discipline in necessarily always desirable .Countries also have other domestic goals besides maintenance of the fixed exchange rate and price stability,such as the generation of high levels of employment and of reasonably rapid economic growth .A BOP deficit implies that,whether the adjustment is accomplished trough the automatic reduction of the money supply or through contractionary tedencies will serve to worsen the internal situation.the united states faced this dilemma in a number of years in the 1960s.

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