INTERNATIONAL ECONOMICS AND FINANCE Essay Example | Topics and Well Written Essays - 2250 words

INTERNATIONAL ECONOMICS AND FINANCE - Essay ExampleThe exchange invest of the local currency comes down due to interplay of demand and leave. The adrift(p) exchange set system based on demand and supply is a self-adjusting implement in market economy. But, stability in exchange rate is very important for the growth of the economy. Therefore, the central bank of a landed estate exercises its fiscal bureau to ensure that the local currency is traded around the desired or target exchange rate. The central bank closely monitors movements of exchange rate of the countrys currency. It will intervene in the market by resorting to open market purchase or sale of currencies to maintain stability or for influencing the exchange rate of the local currency in relation to foreign currencies. Spanjers (2009, p. 10) stated As the expectation of stable exchange rates tends to promote trade and thus welfare, the monetary authority of each country commits itself to exchange rate targets. Centra l bank also in its liquidity management through monetary policies influences money supply in the country with a view to regulate interest rates and keep inflation down the stairs control. Money supply in a country will also influence the behaviour of exchange rates. The interest rates and inflation are closely linked to the behaviour of the exchange rate. Gold measuring system In Bretton Woods Conference in 1914 the participant countries have agreed to adopt gold standard system which envisaged economic discipline among the nations. But, it could non succeed in achieving the objectives mainly due to currency devaluation spree post-World War-I by the countries to maintain or improve their exports. While devaluation strategy was adopted to make the countries products warring in the world market, in order to make the local products more competitive locally, they also introduced trade restrictions which made the imports costlier. These measures taken by the governments for protectin g their home(a) economies had severe impact on the international trade. To stem this tide in international economy, International Monetary Fund was created in Bretton Woods in 1944 with the vex of preserving global monetary order. The exchange rates of the currencies fixed in relation to US Dollar or gold could not work smoothly for a long period. Defending these fixed exchange rates has become increasingly difficult due to several factors. Under the fixed exchange rate government the country has to continuously monitor the system and impose several restrictions on transactions involving foreign exchange. These restrictions are likely to encourage black market trading operations in foreign exchange. The question of devaluation of the currency for a country with fragile economy is the greatest cause for concern. The countries current account imbalances caused failure of the system because under consistent deficit in current account a currency cannot be kept artificially at a high er exchange rate. constancy in Floating exchange rates and economy The stability factor, being the major concern relating to exchange rates, could not be addressed in floating exchange rate system based on demand and supply for currencies as well. The process of self adjustment expected to come into play is abnormal by several factors. For example, when a currency becomes weak, the imports become costlier and exports more profitable and the volume of exports is expected to increase. The increased demand for local currency due to exports and