1, beneficial effects:
(1) In order to prevent a large loss of foreign exchange reserves, under the floating exchange rate system, the monetary authorities of various countries have no obligation to maintain a fixed exchange rate of their currencies. When the local currency exchange rate falls, there is no need to use foreign exchange reserves to buy and sell the local currency, which can avoid a large loss of domestic foreign exchange reserves.
(2) Saving international reserves. Under the floating exchange rate system, the exchange rate automatically reaches equilibrium with the fluctuation of foreign exchange supply and demand. The government allows the exchange rate to be dominated by the foreign exchange market to a large extent, and reduces intervention, so the demand for foreign exchange reserves needed by the country can naturally be reduced. This will help to save international reserves and make more foreign exchange available for domestic economic construction.
(3) Automatic adjustment of the balance of payments, constantly adjusting the exchange rate according to market supply and demand, can make a country's balance of payments automatically reach equilibrium, thus avoiding the serious consequences of long-term imbalance. When a country has a deficit in its balance of payments, its currency will begin to depreciate, and this depreciation will be distributed to both surplus countries and deficit countries.
(4) Maintain the independence of economic policies. Floating exchange rate system enables countries to implement their own monetary policy, fiscal policy and exchange rate policy independently. Under the fixed exchange rate system, in order to maintain the upper and lower limits of the exchange rate, governments must try their best to maintain their external balance. For example, when a country has a deficit in its balance of payments, it often adopts austerity policies and measures to reduce imports and domestic expenditures, which leads to a decline in production and an increase in unemployment. In this way, the domestic economy is sometimes subject to the balance of foreign countries. Under the floating exchange rate system, the balance of payments is automatically adjusted through exchange rate leverage. When a country is temporarily or periodically unbalanced, exchange rate fluctuations in a certain period will not immediately affect the domestic currency circulation, and a government need not rush to use monetary and fiscal policies that undermine the domestic economic balance to adjust the balance of payments.
⑤ Reduce the impact of inflation and minimize the international transmission of economic cycle and inflation. Countries with close trade relations can easily spread economic cycles or inflation through fixed exchange rates. The international inflation from 197 1 to 1972 is closely related to the fixed exchange rate system. Under the floating exchange rate system, if a country's domestic prices generally rise and inflation is serious, it will cause the foreign exchange rate of the country's currency to fall, and the rise in the local currency price of the country's export commodities will be offset by the fall in the exchange rate, and the price of export commodities converted into foreign currency will not change much, so that trading partners will be less under the pressure of rising foreign prices. However, under the fixed exchange rate system, in order to maintain a fixed exchange rate, countries have to experience the same inflation.
⑥ Alleviate the impact of international hot money. Under the fixed exchange rate system, maintaining the fixed exchange rate of currency will seriously deviate from the monetary value, and all kinds of international hot money will chase hard currency that can be used to preserve value or make profits from exchange rate changes, which will lead to a large-scale unilateral transfer of international hot money. Under the floating exchange rate system, the exchange rate is frequently adjusted due to the balance of payments and currency changes, so that the currency will not deviate from the exchange rate seriously, and the possibility of some hard currencies being hit hard will also be reduced. Under the floating exchange rate system, capital outflow will devalue the country's currency in the foreign exchange market. This devaluation will make the country's producers more willing to automatically adjust the balance of payments. Conducive to the independence of domestic economic policies. 5. Minimize the international transmission of economic cycle and inflation.
2. Adverse effects:
(1) encourage speculation, aggravate the turmoil. Under this system, the exchange rate changes frequently and greatly, which provides opportunities for foreign exchange speculation with low buying and high selling. Not only ordinary speculators participate in speculative activities, but also banks and enterprises have joined the ranks. In June, 1974, one of the largest private banks in Germany, Gaston Bank, closed down due to the loss of $200 million in foreign exchange speculation. Others, such as Franklin Bank and UBS, have also caused credit crisis due to foreign exchange speculation. This huge and frequent speculation has aggravated the turmoil in the international financial market.
(2) International trade and international investment, exchange rate fluctuations lead to price fluctuations in the international market, making people generally feel insecure. The uncertainty and risk of foreign trade costs and foreign investment gains and losses increase, which makes people reluctant to conclude long-term trade contracts and make long-term international investments, seriously affecting international commodity circulation and capital lending.
(3) With the intensification of the currency war, the main purpose of implementing the exchange rate downward adjustment policy is to stimulate exports, reduce imports, improve the trade balance, and then expand the domestic economy and increase production and employment. Floating exchange rate may lead to competitive devaluation. All countries use currency devaluation as a means to export their unemployment or expand employment and output at the expense of other countries' economic interests. This is a beggar-thy-neighbor policy. The floating exchange rate policy is mainly to reduce the balance of payments surplus and alleviate the domestic inflationary pressure. For example, from the fourth quarter of 1980, the exchange rate of the US dollar rose, and by September of 1983, the value of the US dollar against 10 industrialized countries rose by an average of 46%. The implementation of the high exchange rate has greatly reduced the inflation rate in the United States. 1979 ~ 1980, the inflation rate was as high as 12% ~ 13%, and it dropped to 3.9% in 1983. It is estimated that the floating exchange rate of the US dollar from 198 1 to 1983 has reduced the inflation rate in the United States by 45%. Of course, the high exchange rate is not conducive to American exports, during which the trade deficit between the United States and western European countries widened, which in turn forced the United States to strengthen trade protection measures. Make its contradiction and friction with western Europe and Japan intensified.
There is an inflationary tendency, and floating exchange rate has its inherent inflationary tendency, which enables a country to implement inflation policy for a long time without worrying about the balance of payments. Because the fluctuation of its exchange rate can automatically adjust the balance of payments to a certain extent.
⑤ Difficulties in international coordination. The floating exchange rate system encourages countries to be selfish or decentralized in exchange rates, weakens international cooperation in the financial field and intensifies contradictions in international economic relations.
⑥ It is not good for developing countries. When the foreign exchange rate rises, the prices of manufactured goods widely imported by developing countries will rise, and these products are necessary for economic construction in developing countries, so the import cost will rise. When the foreign exchange rate drops, the price of export primary products drops, but the demand elasticity of primary products is small, which will not increase foreign trade income and improve trade balance. Floating exchange rate also aggravates the difficulty of foreign debt management and increases risks.
Tips: The above contents are for reference only.
Reply time: 2021-11-09. Please refer to the latest business changes announced by Ping An Bank in official website.