Running head: FIXED VERSUS FLOATING EXCHANGE RATES

Fixed Versus Floating Exchange Rates
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Institution

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FIXED VERSUS FLOATING EXCHANGE RATES

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Fixed Versus Floating Exchange Rates
The debate about the most appropriate exchange rate system to be adopted by economies
of the world has continued unabated despite the uncoupling of the Bretton Woods exchange
system. The recent instability in the floating exchange rates system has led to renewed campaign
by proponents of fixed exchange rates. Monetary policy autonomy and automatic trade balance
adjustments are the two key elements that drive the argument in support of floating exchange
rates. A country’s ability to increase or reduce its money supply is restricted under a fixed
exchange rate system as there is demand to maintain exchange rate parity (Hill & Hult, 2016).
This is evident by either inflation, which is caused by monetary expansion or higher interest
rates, which attracts foreign investment and put pressure on fixed exchange rate. The lack of
obligation to maintain exchange rate parity that is possible under a floating exchange rate system
will give monetary control to the government of the country.
An example to support this argument is when a government that wish to address the issue
of unemployment in the country can increase money supply to stimulate local demand of goods
and services without the burden of maintaining exchange rate parity. Although, this can lead to
inflation, this effect will be offset by depreciation of the country's currency on the foreign
exchange markets. The benefit of inflation under a floating exchange rate systems for
international business is the lack of competitive cost of business operations due to currency
depreciation. The government of this country can also contract the economy by reducing thr
supply of money without the concern to maintain exchange parity (Gabaix & Maggiori, 2014).
Trade balance adjustment is much easier under the floating exchange systems because the deficit
that resulted from increased imports and fewer exports will be offset by exchange rate
depreciation. In the fixed system, the adjustments will only be made possible by currency
devaluation approved by the International Monetary Funds.
In contrast, the key elements of the argument in favor of a fixed exchange rates system
are fiscal discipline, speculations, financial risk and the absence of link between balance of trade
and exchange rates. A fixed exchange rate encourages monetary discipline by limiting thr
capacity of governments to increase inflation that resulted from the increase in the supply of
money in the economy. Maintaining exchange rare parity ensures that this happens. Frenkel &
Johnson (2013) further explained that speculation, which is a prominent practice under floating
system is prevented by the fixed system. This activity, which is not based on sound economic
analysis, can lead to recession in a country. Uncertainty and the absence of connection between
the trade adjustments and exchange rate are the other elements that proponents of fixed system
uses as argument to support the system. The impact of either exchange rate system on
international business is not known, as there is limited evidence to support this assertion (Hill &
Hult, 2016). However, there is an urgent need to develop a model of fixed exchange rate system
that will assist the development of international business and trade. One thing is clear, Economist
need to agree on the most appropriate system that will beneficial to international business.

FIXED VERSUS FLOATING EXCHANGE RATES

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References
Frenkel, J. A., & Johnson, H. G. (2013). The Economics of Exchange Rates (Collected Works of
Harry Johnson): Selected Studies (Vol. 8). Routledge.
Gabaix, X., & Maggiori, M. (2014). International Liquidity and Exchange Rate Dynamics (No.
W19854). National Bureau of Economic Research.
Hill, C. W. L., & Hult, G. T. M. (2016). International Business: Competing in the global
Marketplace.


Running head: GROWTH OF GLOBAL CAPITAL MARKETS

Growth of Global Capital Markets
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GROWTH OF GLOBAL CAPITAL MARKETS

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Growth of Global Capital Markets
The emergence of a global capital in the last decade has transformed the manner in which
corporations and individual engage in the act of buying and selling financial securities on an
international scale. This structured capital market is the product of interlinking the several
national investment exchanges located around the world. The removal of the regulatory barriers
that restricted international financial investment transaction has created a means for global
corporations to raise capital from multiple exchanges by issuing equity or bonds. A global capital
market unlike the generic capital markets has several benefits for both the investors and
borrowers. The increase in the supply of funds is beneficial to the borrower because there is
more funds available which reduces the cost of capital. For instance, Diamler-Benz the biggest
industrial corporation in Germany raised $300 million in capital by issuing new stocks in
Singapore. In 1996, Deutsche Telekom, another German company raised $13.3 billion by
simultaneously listing its shares for sale on stock exchanges in Frankfurt, London, New York,
and Tokyo (Kristoufek &Vosvrda, 2013). International portfolio diversification that provides
large investment opportunities with diverse risks is the main benefits investors derive from a
global market. These two factors have spurred the growth of the global capital market since its
emergence.
Kristoufek & Vosvrda (2013) explained that figures for cross border loans in 2006 were
$17.8 trillion in an increase from the $3.6 trillion value of 1990. Figures for international bonds
also rose from approximately $3.6 trillion in 1997 to $18 trillion in 2006. The growth trend is the
same with international equities. Financial forecast from local and international financial
institutions show that current growth trend of the global capital market will continue in the next
decades. One of the factors that is responsible for the rapid growth of global capital market is the
need continuous rate of industrialization and urbanization. Hill & Hult (2016) noted that the huge
gap between urban and rural population in most parts of Africa and Asia remains a huge
potential for rapid market growth. The main economic activity current practiced in the rural areas
is subsistence farming. The increased rate of rural-urban migration means there is a new market
for most products and services thereby resulting in increased production by companies to meet
this increased demand.
A second factor that has influenced the current growth trend of global capital market is
strong population growth. According to Fuller (2016), demographic data revealed that the current
rate of increase in population of people in the working age category of the population will
increase by 9.4 percent in the next two decades. The implication of this strong population growth
is that there will be higher investment and saving rates. The increased liquidity in addition to
improved productivity will lead market growth. A situation that supports this argument is
presently happing in Asia where China is investing 40 percent of its annual GDP. The need for
developing to catch up with advanced e...