10 Merits of Fixed Exchange Rate System | International Payments

Fixed exchange ratio system is claimed to have the following merits:

1. It contains an element of certainty which helps exporters or importers in conducting their business. It, thus, encourages development of international trade.

2. It ensures a regular flow of foreign capital and supports progressive planning efforts.

3. It is essential to have an orderly growth of world’s money and capital markets and the regularised flow of international capital movement. It facilitates long-term international investments.

4. It rules out speculative activities in foreign exchange.

5. It gives an added incentive to the country to adjust its domestic affairs in order to maintain sa fixed exchange rate.

6. It is more advantageous to follow a fixed exchange rate system than one with fluctuating rates in modern times when the economic traffic among the nations has become too vast and complex.

7. It is desirable if multilateral trade transactions and agreements are to be encouraged through regional economic co-operation of different countries.

8. It systematises the world’s monetary system. Thus, the IMF has adopted fixed or pegged exchange rate system.

9. A stable exchange rate will also assist in internal economic stabilisation. On the other hand, freely fluctuating exchange rates encourage abnormally high liquidity preference which leads to hoarding, higher rates of interest, shrinking investment and increasing unemployment.

10. For small countries like Denmark and Great Britain, in whose economy foreign trade plays a crucial role, stabilisation of the exchange rate, is the only right policy. For, if a country does not stabilise her exchange rate, fluctuations in the rate of exchange will disturb her foreign trade and with it the prosperity and growth of the country.

Since the advantages of the system of stable exchange rates mentioned above are substantial and carry much weight, the IMF aimed at maintaining stable or pegged exchange rates for its members. However, in recent years, there has been a strong opposition against the fixed exchange rate system. For various reasons, most of the member countries have found it difficult to pursue a fixed exchange rate policy as desired by the IMF.

Submitted by : Dr. Angel, Category : International Trade, Tag : Fixed Exchange Rate System