Floating exchange rates the only viable solution Floating Exchange Rates The Only Viable Solution Stentor Smith For some, the collapse of Mexico's economy proves that floating exchange rates and markets without capital controls are deadly. Others find the crash of the European exchange-rate mechanism ERM in to be proof that targeted rates will always be overturned by the free market. Many see the breakup of Bretton Woods as the failure of fixed rates.
PDF As I near the end of my term as Governor, I find myself looking back more and more, focusing on the broad, longer-term trends in our economy and in financial markets and on what those trends may imply for the future.
One of the issues that has often surfaced over the years is the exchange rate for the Canadian dollar.
Indeed, over the past couple of years, it has been a topic of considerable public discussion. That discussion has revolved around such questions as: Should we continue floating, or should we peg our currency to the U.
In fact, should we even keep our own currency, or should we adopt the U. That there is such interest in our exchange rate is hardly surprising. Some of the more recent attention no doubt stems from public concern about the relatively low value of the Canadian dollar in comparison to the U.
But the fundamental reason for this interest is that the exchange rate is an important price in an economy, particularly in one as open as ours. Exports represent about 40 per cent of total Canadian output. And if we add imports, this proportion doubles to 80 per cent.
In addition, more than 80 per cent of this trade is with the United States. So the value of our currency in terms of the U. But we must be careful not to exaggerate this point, because when it comes to exports, we compete with many other foreign countries for a share of the U.
And so the exchange rates of those currencies relative to ours also matter a great deal.
Inafter the Second World War, Canada became the first major country to adopt a floating exchange rate. Inwe went back to a fixed exchange rate only to float our currency again in In all, the Canadian dollar has floated for 42 out of the past 50 years.
No other major country has had as much experience with a floating exchange rate. This does not mean that our floating exchange rate regime has somehow outlasted all its critics! For the most part, though, the debate over the years has been about the market value of the Canadian dollar—whether it has floated too high or too low, especially from the viewpoint of certain exporters and importers.
More recently, however, and certainly here in Montreal, some of the discussion has focused more on whether a floating currency is the right exchange rate regime for Canada. This particular debate has been kindled by the advent of the euro and its adoption by 11 members of the European Union at the beginning of I entered that debate early inarguing that the introduction of the euro was a remarkable achievement, but that it did not provide a useful role model for Canada and for our position in North America.
Since then, with increased interest in the subject internationally, there has been considerable discussion of exchange rate alternatives for Canada and for other countries. In Canada, the debate about exchange rate regimes has been mainly among academic economists. But, with the decline of our currency against the U.
Outside Canada, the debate on exchange rate regimes has also become more active, especially in parts of Latin America that have had a long history of high inflation and exchange rate crises. Indeed, in some of these countries, commentators have argued in favour of the outright adoption of the U.
Today, I would like to return to the issue of the right exchange rate regime for Canada. Having again considered the advantages and disadvantages of our current arrangements, I can tell you at the outset that I remain convinced that a floating exchange rate continues to make sense for us at this stage of our history.
I propose to examine the different sides of the argument with respect to a floating currency in as simple and straightforward a manner as possible.Floating exchange rates, he argued, would help insulate the domestic economy from external shocks and would provide national policy authorities the ability to satisfy domestic goals (Friedman The free Marketing research paper (Floating Exchange Rates- The Only Viable Solution essay) presented on this page should not be viewed as a sample of our on-line writing service.
If you need fresh and competent research / writing on Marketing, use the . The only realistic and economically sound solution, problematic though it may be, is to have exchange rates float freely and without restriction. Bibliography Becker, Gary S. "Forget Monetary Union—Let Europe's Currencies Compete.".
Read Elizabeth M. Boschee's essay on "Floating Exchange Rates: The Only Viable Solution." This essay was the first-place award winner in the essay contest sponsored by the Federal Reserve Bank of Minneapolis. A floating exchange rate is a regime where a nation's currency is set by the forex market through supply and demand for that particular currency relative to other currencies.
But two of the world’s biggest developed countries also have “commodity currencies” – and they both have freely floating exchange rates. Canada is a major oil exporter, and Australia is the world’s largest exporter of iron kaja-net.com: Frances Coppola.