Sources and Consequences of Exchange Rate Viability - Literature review Example

Download file to see previous pages The paper "Sources and Consequences of Exchange Rate Viability" is a great example of a finance and accounting literature review. Since the aftermath of the recently occurred financial crisis, interest rate variability has largely triggered a surge in the capital inflows to the majority of the emerging market countries. Currently, the high growth of a number of emerging market countries, particularly in Asia, is continuously in support of commodity prices. Although this favorable external environment creates more opportunities, it further raises certain risks and challenges. For instance, capital inflows, as well as increased prices of commodity export, exert more appreciating pressures on the existing exchange rate. As a result, policy challenges in most countries pose more concern that very strong currency may undermine the competitive ability of their tradable economic sectors as well as weakening its growth.

Economic growth is highly affected by exchange rate variability. Other scholars emphasize that any emerging deviations of exchange rates from its main fundamentals such as long-term value lead to a reduction in economic growth. It has also been discovered that though overvalued exchange hampers growth, the undervalued exchange rate greatly fosters growth. However, instability in the exchange rate to a larger extent hinders growth. . Exchange rate variability has been identified as a puzzle which leads to understanding that fundamentals are not relevant determinants of the exchange rate. The impact of real exchange rate variability on the increased demand for agricultural imports by the developing countries has potentially significant implications for the U.S. exporters due to the potential for the expanded trade.

Perhaps the most significant characteristic of unconventional exchange rate systems is its feature used to describe them such as fixed or floating. For instance, the fixed exchange rates, by characterization, are not expected to change. They are inevitably required to remain fixed for, in an ideal world, a permanent period of time.

...Download file to see next pages Read More