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"With specific reference to the UK economy over the past 20 years, critically discuss the relative advantages and disadvantages of operating a floating exchange rate regime"
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In a floating exchange rate system, the market forces determine the value of the currency; that is, by the interactions of several of banks, firms and other institutions seeking to sell and buy currency for the purposes of clearing transactions, arbitrage, hedging, and speculation. In October 1990, the UK joined the European Exchange Rate Mechanism (ERM), where the Sterling Pound was fixed against other currencies. In September 1992, UK left the ERM when the pound experienced sustained selling pressure, and the monetary authorities could no longer justify extremely high interest rates to maintain the value of the pound, when the domestic economy was under a deep recession. Since 1992, UK has adopted a flexible exchange rate system; there is no official intervention by the Bank of England to the currency markets to attain the desired level of exchange rate (Roderick & Paul 2004, p.143).
The following are the key arguments in favor of a flexible exchange rate. First, reduced necessity for currency reserves; there is no target for an exchange rate level meaning there is little necessity for the Bank of England to hold large scale reserves of foreign currency and gold to use in possible official intervention, in the currency markets. However, in the real world, for example, in UK, the government always has some currency reserves, in case of balance of payments crisis, or the sentiment that the Sterling Pound is getting a bit too low or too high (Karl 2010, p.182). Second, useful tool of macroeconomic adjustment; a floating exchange rate may act as a useful instrument of macroeconomic adjustment. For example, depreciation of the currency should provide a boost in demand of net exports and thereby stimulate growth. This assumes that the higher wage claims or export prices do not dissolve the achievements from a low exchange rate as noted
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Like other industrialised states, the UK economy adopted the fixed exchange rate system to manage pound when this system was introduced. However, to strengthen the value of pound, the UK government adopted the floating exchange rate system. Therefore, from 1944 to 1972, UK adopted the fixed exchange rate system to manage pound and from 1992 to 2001, UK government adopted the floating exchange rate system (Tutor2u).
However, the administration was carried out with the cooperation of the Ministry of International Trade (MITI) and Industry and the bank of Japan. MITI also handled licenses related to exports and imports. However, the authority for approving major payments was given to the authorized banks in Japan.
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These schemes have achieved at least some achievement as numerous countries in the area have experienced financial recovery with convenient inflation. Despite this development, troubles remain. The most of note issue is the monetary vulnerabilities as exemplified by the fall down of the Mexican peso.
A floating exchange rate, also called s flexible exchange rate is "a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market" (Wikimedia Foundation, Inc). In the field of economics, we say that it is "determined by the private market through supply and demand" (Investopedia).
mitted to Kazakhstan through channels which include, "lost competitiveness, shrinking bilateral and global markets, terms of trade shocks and shifting foreign direct investments"(Ohno and Zhakparova, 1999, p.1).With the adoption of floating regime, temporary non-market steps
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The fixed exchange rate system is also termed as the pegged exchange rate system where one currency is
In addition, the company offers huge discounts to members, who order regular deliveries of grocery and perishable goods, hence making it difficult to earn profits on such huge discounts (Stewart, 2014). Similarly, the company offers reduced prices on Kindle and
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