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  • How Do You Explain the Rise and Fall of the Bretton Woods System?

     

    Essays4 Economics

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ID number:951525
Evaluation:
Published: 01.12.1996.
Language: English
Level: Secondary school
Literature: n/a
References: Not used
Extract

In contrast, Milton Friedman argues that hard-fixing currencies to each other, like in the case of the Euro, is favourable in terms of reduction in transaction costs, which lead to increase in international trade and foreign direct investment. However, from his point of view the country which fixes the exchange will also have to bear the economic cost of adjusting to external forces that affect it differently than the other country or countries (in the case of Euro) whose currency it shares. Adjusting to such external forces with a fixed exchange rate requires adjustments in many individual prices and wages that could be avoided if it could change the exchange rate. What he argues is that having independent monetary policy, hence a relatively unstable exchange rate policy, is actually beneficial because it is a more efficient system of adjustments to exogenous shocks. A flexible exchange rate would allow each member country of the EMU to have the appropriate monetary policy, which can lead to a healthier economic growth.
Coming to a conclusion, I would like to state that there are undeniable advantages of having hard-fixed exchange rate policy, some of the most important of which are increase in foreign direct investment, reduction in transaction costs and to some extent reduction in speculative movements. …

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