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CHAPTER 25 NATIONAL AND GLOBAL CHOICES: FLOATING RATES AND THE ALTERNATIVES Objectives of the Chapter One of the key economic decisions that each country has to make is what exchange rate policy it should use. Although there is a clear trend toward floating exchange rates today, some countries still adhere to fixed exchange rates. Others choose a regime between the two extremes of a pure float and a permanently fixed rate. As you have seen in the previous two chapters, the exchange rate system a country chooses will have implications for domestic stability and domestic policymaking. In making the choice between one exchange rate regime and another, governments must consider a number of issues, including the stability of their own country versus the stability of their partners, the credibility of policymakers, the ease (or difficulty) with which payments imbalances can be addressed, and the desire for complete independence in policymaking. In the most general sense, we find that floating rates are more consistent with autonomy and protection from external shocks, whereas fixed rates create strong economic interdependence among countries (with both good and bad outcomes). After studying Chapter 25 you should be able to discuss the advantages and disadvantages of fixed and floating exchange rates with respect to policy issues such as: 1. The impact of domestic shocks on income levels. 2. The power of government policies to affect income. 3. The ability to conduct macroeconomic policy independent of other countries. 4. The ease with which a country can trade in goods and services and in financial assets. Important Concepts Currency board: One system for fixing a country’s exchange rate. The board stands ready to exchange domestic currency for foreign currency at a rate specified and fixed , and can issue new domestic currency only in exchange for foreign reserves. In essence, the domestic currency is
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This note was uploaded on 02/18/2010 for the course ECON 343 taught by Professor Dblack during the Fall '09 term at University of Delaware.

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