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Fixed Exchange Rate

In: Business and Management

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1) Imagine that Canada, the US, and Mexico decide to adopt a fixed exchange rate system. What would be the likely consequences of such a system for
(a) International businesses If the United States, Canada and Mexico were to adopt a fixed exchange rate system, most likely Canada and Mexico’s currency would be fixed to the United States’. Exchange rate risks discourage foreign investment. Currency fluctuations make it difficult for businesses to do financial forecasting. This has an effect on pricing and costs (International Exchange Rate, n.d.). The benefits for an international business operating under a fixed exchange rate in North America would be economic stability. If exchange rates were to become fixed and stabilized, I believe that international businesses would be more likely to trade and invest in North America.
(b) The flow of trade and investment between all three countries? Fixed exchange rates eliminate competitive devaluations. Furthermore, monetary discipline is enforced and inflation is controlled. Canada, Mexico and the U.S. would be bound to maintain their exchange rate parity with each other and would thereby greatly reduce economic uncertainty. It is argued that this in turn would encourage greater foreign investment and more international trade with each other (Hill, 2013).

2) List the relative merits of fixed and floating exchange rate regimes.
Fixed Exchange Rates:
• Imposes monetary discipline by eliminating competitive devaluations
• Imposes monetary discipline by controlling price inflation
• Limits the destabilization effects of speculation
• Eliminates uncertainty in exchange rates
Floating Exchange Rates:
• Monetary autonomy
• Automatic trade balance adjustments
From the perspective of an international business, what are the most important criteria for choosing between the systems? Which system is the more…...

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