Exchange Rates: Systems and Policies

Abstract

Discussion of exchange rates ties in closely with the analysis of the balance of payments in the previous chapter. Under a system of fixed exchange rates it is volumes that alter, with payments disequilibria resulting in changes in reserve holdings. Under flexible exchange rates it is the price variable, i. e. the exchange rate, that changes in response to disequilibria. In principle the level of reserves does not change. As these remarks suggest it is the way in which disequilibria are revealed rather than their basic causes that differentiates fixed rate and flexible rate systems.