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Essay / Research Paper Abstract
This 14 page paper examines the floating and the fixed exchange rage mechanisms, explaining what they are, their characteristics, looking at the way that they manifest, using specific examples and considering the benefits and the problems associated with each model. The bibliography cites 9 sources.
Page Count:
14 pages (~225 words per page)
File: TS14_TEfloatfix.rtf
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Unformatted sample text from the term paper:
managed; the main choices are a fixed or a floating rate currency. Fix exchange rates, also known as pegged exchange rates are where two currencies, or more, are fixed at
a specific exchange rate which eliminates the potential of any change of value between the currencies that are in the fixed or pegged scheme. By comparison a floating rate is
one where there is no fixture against another currency; the value will be determined by market forces. Each of these models has advantages and disadvantages, a useful model to
start a comparisons the incompatible trinity, this gives context to the trade offs and the potential of the different exchange rate mechanisms, following this the way that the different exchange
rate models operate can be looked at by considering their manifestation and influences. The incompatible trinity is also known as the impossible trinity and the unholy trinity. The underlying
idea here is that there are three elements that are desired in an economy which cannot all exist in balance and harmony; they are incompatible. The three factors in Mundells
(1968) model are o Perfect capital mobility o Domestic monetary sovereignty and o Fixed exchange rates. This leaves government with policy dilemmas regarding which of
the three factors are more important and will be followed (De Grauwe, 2003). The policies may be the ensure free capital movements, to develop or maintain stable exchange rates or
to ensure monetary authority autonomy takes place. It is argued that two of these ay be seem but not three (Mundell, 1968). For example, the first
two of these goals; free capital movements and stable exchange rates may be achieved with the development of an exchange rate mechanisms, but this means that the third goal or
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