While a fixed exchange rate regime sets a monetary policy rule to keep the local money at a fixed rate in a trustworthy money; a float regime removes that rule. The PPP theory explains that floating currencies are valued according to what they will buy.
Exchange rate movements follow inflation differentials fairly closely. The PPP implies that the country with higher inflation will have a depreciating currency. With a fixed exchange rate between two regions, the adjustment to bring PPP about is interregional money flows rather than exchange rates changes.
Money will go away where its purchasing power is higher until it equalizes”
With a fixed exchange, it is possible to avoid:
Money flows are reflecting disequilibrium between prices levels in two countries and they’re correcting the disequilibrium”.
Among Latin American countries, floating regimes have shown:
All due to the greater risk of depreciation facing investors.
White finishes talking about dollarization, a hard type of fixed exchange rate, that some countries had adopted to reduce the risks of floating regimes.
Economist and professor
05 de noviembre de 2020
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Nuestra misión es la enseñanza y difusión de los principios éticos, jurídicos y económicos de una sociedad de personas libres y responsables.
Universidad Francisco Marroquín