Does an exchange rate regime matter Use Ghosh and other s analysis to examine and discuss
Does an exchange rate regime matter? Use Ghosh and other・s analysis to examine and discuss critically the linkage between the exchange rate regime and maco performance for a selected country. What exchange and policy prescription might be drawn from your analysis. Introduction According to the book ： Economics ： written by Michael Parkin, the term ： exchange rate； means ： The exchange rate is the price at which two currencies can be traded. ： There are three different types of Exchange rate regime. ... A fixed exchange rate system means there are interventions from the central bank in order to maintain the stability of the country・s currency. A floating exchange rate system means there is no intervention from the central bank. In other words, the value of the currency is determined by its market demand and supply. ... In an economic point of view, exchange rate regime is one of the key determinants to a country・s macro-performance. Different types of regimes would have different effects in the level of inflation and the growth rate of an economy. Body In Ghosh・s paper, the difference on macroeconomic performance under the fixed exchange rate system and the floating exchange rate system is focused. Ghosh claimed that if the fixed exchange rate regime were used, the level of inflation would be relatively lower than the country, which is running the floating or intermediate exchange rate systems. ... The discipline effect means the political costs for changing the entire system from fixed to floating, as there may be a need to adjust other policies. ... When the exchange rate is fixed, people would take less risk in the depreciation of domestic currency. As a result, the discipline effect drives the government to continue using the fixed exchange rate rather than making any changes. Because of the fixed exchange rate, the variation of domestic currency is relatively smaller, under the confidence effect; people would be more willing to hold the money. ... Regarding to the economic growth, the difference in exchange rate system would influence the level of investment and the rate of growth in productivity. In Ghosh・s argument, he claimed that the fixed exchange rate system would have an increasing effect in investment by decreasing policy uncertainties due to the discipline effect mentioned above in the inflation part and the decreasing of real interest rate. The reason why the decrease in real interest rate would lead an increase in the level of investment could be interpret by the following graph.