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How were floating exchange rate introduced?

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How were floating exchange rate introduced?

    • Posted by Mridul Gupta 6 years, 7 months ago

    CBSE > Class 10 > Social Science
    • 1 answers

    Yogita Ingle 6 years, 7 months ago

    1. Reduced need for currency reserves: There is no exchange rate target so there is little requirement for a central bank to hold foreign currency reserves to use during intervention
    2. Useful instrument of economic adjustment: For example depreciation of the exchange rate can provide a boost to exports and stimulate growth during a recession and/or when there is a risk of deflation. A good example of this is Poland whose currency the Zloty depreciated against the Euro in 2009-10 which helped Poland to avoid recession during the global financial crisis. Indeed Poland was one of the few EU countries to avoid a slump during this difficult period.
    3. Partial automatic correction for a trade deficit: Floating exchange rates can help when the balance of payments is in disequilibrium – i.e. a large current account deficit puts downward pressure on the exchange rate, which should help exports and make imports relatively more expensive. Much depends on the price elasticity of demand and supply of exports and the price elasticity of demand for imports – see the later section on the Marshall-Lerner condition and the J-curve effect

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