Determination of exchange rates By Mr. Benz & Mr. Win.

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Presentation transcript:

Determination of exchange rates By Mr. Benz & Mr. Win

Free Floating Exchange Rates Changes in market demand and market supply in foreign exchange market cause a change in value Consequently, trade flows and capital flows (investment) are the main factors affecting the exchange rate. No government intervention (no target for exchange rate)

Advantage of Free Floating Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit. Allows the government/monetary authority flexibility in determining interest rates as they do not need to be used to influence the exchange rate.

Fixed exchange rates Commitment to a single fixed exchange rate

Why fixed exchange rates? Stable currency Speculative attack Help domestic producers firms and employee (competitive in international market) Inflation (depends) Can reduce BOP deficit (lower imports)

Managed flow Exchange rate determined by market demand for and supply of the currency with no pre-determined target for the exchange rate set by the Government

Why managed flow? Inflation DOWN (rising currency) Avoid trade sanctions Relatively stable currency (investors) Equilibrium (automatically)