Demerits of Fixed Exchange Rate

Fixed exchange rate refers to a monetary policy where the government or central bank ties the value of its currency to another currency or asset. Although there are some advantages of fixed exchange rate, there are also some demerits that should be considered:

1. Ignores National Interests

Fixed exchange rate often ignores national interests because it is based on the value of another currency or asset. In this case, the government or central bank has to prioritize the interests of the currency or asset to which it is tied. This can limit the ability of the government to implement monetary policies that are beneficial to the national economy.

2. Restricted Movement of Capital

Fixed exchange rate often restricts the movement of capital because it limits the ability of investors to buy and sell currencies. This can be a disadvantage for countries that depend on foreign investments to finance their economic development. In addition, this can limit the ability of domestic businesses to compete with foreign businesses.

3. Sudden Fluctuations in Exchange Rates

Fixed exchange rate can also lead to sudden fluctuations in exchange rates. This is because the government or central bank has to maintain a fixed exchange rate even when market conditions change. As a result, sudden changes in demand and supply for foreign currencies can cause sudden fluctuations in exchange rates, which can be disruptive to the economy.

Conclusion

In conclusion, fixed exchange rate has some demerits that should be considered before implementing it as a monetary policy. It can ignore national interests, restrict the movement of capital, and lead to sudden fluctuations in exchange rates. Therefore, policymakers should carefully consider the advantages and disadvantages of fixed exchange rate before deciding to adopt it as a monetary policy.

All the above