What does it mean to float the currency?
What does it mean to float the currency?
July 25, 2016
Floating currency is to make the exchange rate of the currency as an editor in full, so that the government does not interfere , or the central bank in the determined directly. But it is automatically excreted in the currency market by supply and demand mechanism that allows for the identification of the national currency exchange rate against foreign currencies .
And fluctuate prices of floating currency exchange constantly change with each witnessing supply and demand for foreign currency, so it can be changed several times per day.
can be either pure or flotation be directed:
– pure flotation: are left to determine the exchange rate to market forces and the mechanism of supply and demand in full, and the state refrain from any direct or indirect intervention.
– Flotation prompt: is left to determine the exchange rate to market forces and the mechanism of supply and demand, but the state intervenes (via the central bank) as needed in order to guide the exchange rates in certain directions by influencing the size of the offer or demand for foreign currencies.
Supporters of flotation
for as long as theorists monetary school in Economics defended ( Milton Friedman model) for floating currencies, claiming that the liberalization of exchange rates will make it reflect the economic fundamentals of the various countries (growth, trade balance, inflation , interest rates), and will lead it thus to restore the balance of relations and business accounts The current account is constantly and automatically.
And they see these economists, like the neoclassical trend in the economy, that the liberation of all prices -osar goods and services, interest rates, labor prices (wages), foreign exchange rates (exchange rates) – and leave the identified markets without any interference or direction from the state, always ensures access to state of balance.
This stems from the belief in blind efficient markets, despite the fact that economic reality has proved more than once that the markets in the absence of oversight and control lead to disaster ( the mortgage crisis real estate in the United States model).
And justify those convinced the currency float , saying that any trade deficit will lead to an intense demand for foreign currency, which will lead to devaluation of national currency against foreign currencies, and thus to enhance the competitiveness of the country concerned.
This sponsor, they say, increase exports and reduce imports, Viatdl so the trade deficit is due to a state of balance. The same logic works in reverse direction if there is a trade surplus.
The supporters of the flotation welcomed very much the adoption of major economies in the world to systems of floating exchange rates (flexible) , after the collapse of the Bretton Woods agreement in the seventies of the last century, which had been laid down by the International Monetary system based on fixed exchange rates (but adjustable) between currencies.
cracked the Bretton Woods system in the summer of 1971 after the United States formally reneged on its commitment to transfer all traded in dollars to the world ‘s gold, according to the price specified by the Convention in 1944 (US $ 35 each equivalent ounces of gold.
Nhart the value of the dollar for gold did greenback -gar gold – backed and controlled exclusively for the accounts is monetary policy the US without any regard for the interests of the rest of the world an international standard has the confidence of everyone.
Maintaining a fixed exchange rate against the dollar also has become extremely difficult for many of the economic powers in the world, the latter began to adopt a floating exchange rate system under which left free to determine the value of the foreign exchange market based on supply and demand law.
after several decades of the adoption of a floating exchange rate systems and disseminated to a large number of countries around the world (including developing countries), the currency was floated promises rebalancing has been done to the trade balances of the world, the hopes of his supporters did not materialize.
Artificially low exchange current moved far from the supposed level that leads to a balance, and the biggest proof of that is the size of global imbalances (Global Imbalances), which reached record levels and still are resistant to treatment.
The United States and some European countries as well as many developing countries known as the case of a structural trade deficit for several decades, and in return you know China , Germany , Japan and oil – exporting countries trade surplus structurally.
Instead of floating currencies that ensures a rebalancing of international trade relations, the world knew the case of monetary instability due to the continuing exchange rates and fluctuations big change, which is sometimes subject to any rational logic because of the psychological factors that frame the movement of global speculators.