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Monetary economics - Essay Example

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This statement can be better explained with the help of the fact that during the situation of the international crisis in the economy, the central banks…
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Download file to see previous pages flow of capital can be supported with the example of Argentina which has experienced the floating exchange rate in the economy and the volatility and the evolution of the exchange rate which was not affected severely due to the international crisis in spite of the rise or the increase in the exchange rate.
The arguments in favour and against the topic can be highlighted with the help of the statement that emphasizes that floating exchange rate is effective in implementing the monetary policy and ineffective or inefficient in implementing the fiscal policy whereas in case of the fixed exchange rate it is effective in implementing the fiscal policy and it is unable or incapable for formulating the monetary policy.
In order to derive at the conclusion in ascertaining whether the floating rate has been able to control the inflow and outflow of cash it is required to consider various factors which includes the inflation rate, the credibility of the policy makers, the flexibility in the labour market, the size and the openness in the economy, maintaining of capital mobility and the extent of financial development.
The main aim or the objective of floating exchange rate in controlling the inflow and the outflow of capital is reducing the volatility in the exchange rate and also maintaining the monetary stability in the economy (Arnold, 2008). The floating exchange rate generally considers the economic and financial structure and policies in the economy and the intervention of the central bank in the foreign exchange market either dealing in the spot market or dealing in the forward market for developing the regulation and reserves of the capital inflow and capital outflow. The floating exchange rate focuses on increasing the capital inflow and mitigating the excessive capital outflow. The balance of payment is considered as an important instrument for controlling and dealing with the related inflow and outflow of capital in the economy.
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