Fixed, Floating, and Currency Substitution Exchange Rate Regime

Exchange Rate Regimes in Emerging Markets
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Fixed exchange rate regime
This is a type of regime whereby a country’s exchange rate in relation to foreign currency does not change. As a result, the country is able to mitigate the risks associated with international trade. One of the countries that use this type of exchange rate regime is China. Hong Kong chose this regime at a period when the country was going through a high rate of inflation. The effects of the inflation were affecting the productivity powers of its market as well as the markets of the countries that it used to trade with (Ilzetzki, Reinhart & Rogoff, 2017). The economy was characterized by high levels of unemployment and poor productivity hence making it difficult for the country’s economy to grow. However, with the current regime, the country is able to produce as many products as possible for trade because they are confident that the exchange rates will not affect their levels of income. In addition, another advantage of the fixed exchange rate regime is that the domestic currency does not show a lot of depreciation. Therefore, the regime is a way of maintaining the stability of the local currency. Otherwise, the currency would be experiencing great fluctuations that would, in turn, affect the level of production hence reducing the international trade activities. A currency with a low value makes the cost of production of goods high as compared to the cost of production in other countries (Chkili & Nguyen, 2014). Therefore, it is advisable for the emerging markets to employ this kind of regime to ensure that their market is as much stable as possible. This will play a substantial role in attracting international investors who will result in cumulative economic growth for the domestic country.
Floating exchange rate regime
This is a type of exchange rate regime whereby the currency of a country is regulated by the forex. The regulation depends on the currencies demand and supply. In the case whereby the domestic currencies demand is high, then its price will be high too. In the case whereby its supply is high, then the corresponding result will be a reduction in its price. In this kind of regime, the government of a country has no command in the manner in which the currency fluctuates. Therefore, it is the obligation of the country to ensure that its market is self-regulated to avoid cases of extreme cases when the currency has lost value. Importers and exporters depend a lot on this type of regime to ensure that they make profits at any given time (Ghosh, Ostry & Qureshi, 2015). However, the market of such regime is unpredictable. An example of a country with the floating exchange regime is China. Given the diversity of its market and the current growth, then it has the obligation of combining various exchange rate regimes with the floating regime being one of them. The country chose to incorporate this kind of exchange rate regime in its system to mitigate the risk that is available in its market (Blanchard & Adler, 2015). As a result, it is able to engage in trade treaties without the fear of being exploited because the forex is always fair in the manner in which they price the currencies of different countries. In addition, the market pressures have a great impact on the changes of the currencies. Therefore, it does not only affect China but any other market that is using the same regime.
Currency substitution exchange rate regime
This is a situation whereby emerging market countries use the currency of another country as their main currency. A good example is the case of Zimbabwe that has been using the dollar as its main currency after their currency fell. The main currency of the country depreciated in price hence making it difficult for the government to control the level of inflation that were erupting in the country. The country has an emerging market due to the existence of tourist attraction sites, mining activities, a developing manufacturing sector and good soils that are characterized by an agricultural favorable climate throughout the year. Therefore, as a result of this diversity of resources, the country qualifies to be developed, but their currency has depreciated hence making it difficult to participate in international trade as well as transact in their country (Bowman, Londono & Sapriza, 2015). As a result, they decided to employ the currency substitution regime in order to save their falling currency. The use of the dollar has enabled the country to improve its economic levels hence reducing the levels of inflation. This will enable the currency of the country to appreciate again in value and hence start circulating in the economy making it possible...