Comment On Fixed and Float Exchange Rate Regimes

Abstract

The theory of exchange rate regimes does not provide clear cut preference as to which regimes should
be preferred. Fixed and floating exchange rate regimes each has its own advantages and
disadvantages. Under fixed exchange rates, the country’s export and service sector are stable because
the businessmen need not worry about the fluctuation of the currency, and thereby influencing the
amount of profit made. Moreover, without worry about the fluctuation of the value of the currency,
businessmen can make beautiful enterprise to do business. The implication is that it creates muchneeded
jobs and revenue for the country. In this paper we will prove theoretically that in short, fixed
exchange rates can provide greater insulation of output in the face of nominal shocks. At the same
time, floating exchange rates are better at absorbing real shocks.