Merits/Advantages of floating exchange rate
- It ensures that there is a favourable exchange rate in the foreign exchange market
- It controls actions of speculators
- Monetary authority can still maintain control of the exchange rate
- Helps correct balance of payment
- Floating exchange rate currencies can be traded without any restrictions/ promotes international trade due to easy access to foreign exchange
- It encourages more foreign exchange inflows
- It is automatic mechanism for correcting trade imbalance
- Promotes investment
- Limits illegal foreign exchange trade
- Lower Reserves: For a floating exchange rate, central are not required to keep large foreign currency reserve amounts for defending the exchange rate.
- No import inflation
- Flexible
- Independence: Freely floating exchange rates allow the governments and central banks of a nation to have a great degree of independence
- Lack of policy constraints- the government are free with a floating exchange rate system to pursue the policies they feel are appropriate for the domestic economy without worrying about them conflicting with their external policy.
- Can be a useful absorber when there is an external economic shock – for example, a currency might depreciate in recession giving a lift in export industry
CATEGORIES Economics
TAGS Dr. Bbosa Science
