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The discussion about exchange rates have been existent for a very long time as people try to determine which exchange regime id the optimal rate in regard to the evolution of the world economy and the demeanor of monetary polices. According to Wolf et al (1984, p19) systems such as the gold standard interconnected with other commodities, served to offer a monetary anchor and a standard the facilitating the financing all international transactions for a very long time and for many countries. As such the history of gold standards gives a recollection of the long periods of financial turmoil and the accompanying acute variations in prices and output levels. 

In the 1960 the stress experienced by fixed systems lead to renewed debates over the suitability of fixed systems over flexible one and the flexible regimes can to be appreciated and accepted in many economies. In 1990s however, influential economic thoughts and arguments encouraged fixed rates as a way of handling the hipper inflation that was being experienced in various markets. As the decade came to a close, finical crisis experienced in emerging markets lead to resentment of the argument that had encouraged fixed rates in the early 90s. As a result, great emphases was placed on the values of the flexible exchange rate regimes especially for large emerging markets which were increasingly becoming part of the world economic and financial system. With time, it became apparent that the economies that operated within a system with flexible exchange rate regimes were better placed to withstand the effects of open market capital as compared to the economies that embraced a pegged exchanger rate system (Williamson, 1996, p 96). This debate is going to discus the strengths and weaknesses of the floating exchange rate regimes and the fixed exchanger regime as well as indicate while floating exchange regimes are better that the fixed exchange regimes.

The fixed exchange regimes. In most cases, fixed exchange regimes are seen as being transparent and further avail a simplified anchor for the economies monetary policy. As such states that have institutions that are weak can, through anchoring their currencies with credible central banks, import monetary credibility. Many proponents of this exchange rate regime point out the fact that the fixed exchange rates are advantageous when it comes to reducing the transitions costs and the risks associated with exchange rates. Certainly, this would be very beneficial to countries with underdeveloped or still developing financial systems or sectors as economic agents may no posses the financial tools to deal with long-term exchange risks associated with their currency (Kotlikoff & Auerbach, 1999, p363).

However, adjustments in fixed exchange regimes are slow. The adjustment needs a considerable flexibility in the prices of commodities within the domestic economy, more so when it comes under the influence of a shift in the capital flows. Certainly the rigidity of the fixed exchange rates is a source of numerous constraints on the monetary policies of any country that embraces it. The constraint brings about pressure through a downturn for the pro-cycle fiscal policies. Also notable of these of these fixed exchange rates is that when the interest rates are higher that the dominant rates in the anchor currency, debtors can be encouraged to borrow unhedged in the anchor currency. This in turn can leave the national balance sheet totally vulnerable to the exchanger rates (Montiel, & Agénor,  2008, p308).

It is very difficult for a country to maintain an open market, monetary policy independence policy and at the same time have a fixed exchange rate. Due to amalgamation of emerging markets and the world economy, many countries are trying to achieve central bank independence and low inflation through policy.

Certainly the problems brought about by the fixed exchange rate make it unsuitable for the realization on monetary policies and realization of necessary economic activity required for the development of a country.  This is because the economic activity adjusts to the prevailing exchange rates.

Code: Sample20

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