In the current system, the exchange rates of major currencies (mainly the US dollar, the euro and the yen) fluctuate with market forces; they show some volatility in the short term and, occasionally, marked variations in the medium term. Some medium-sized industrialized countries have also opted for a market-determined floating rate regime; others, including European countries outside the euro area, favored a stronger linkage. There is a wide range of exchange rate regimes in developing and transition countries, as well as a strong but not widespread trend towards more flexible exchange rates. These varied diets coexist in an environment with the following characteristics:
The Wholesome Growth
The industrialized countries have, as a whole, put an end to the restrictive measures of capital movements, and the emerging countries have gradually eliminated them, in order to be efficient and because of their inefficiency. The telecommunication and information technology revolution has also been a driving force behind the growth of international capital flows and the intensification of the globalization of financial markets, as it has led to a significant reduction in transaction costs on financial markets. You should know about Avatrade for getting a finer opportunity in forex trading.
- International private capital flows finance pronounced current external imbalances; however, it seems that, because of their instability, they also sometimes cause macroeconomic shocks or transmit them to the entire international system;
- Developing and transition countries are increasingly present in the integrated global economy, both in trade in goods and services and in financial transactions.
The recent crises in emerging markets have shown that the maintenance of a linkage regime in countries with strong links to international financial markets is accompanied by growing demands due to increased mobility of capital. . Therefore, unless the exchange rate is strictly fixed – currency board, union with another currency or adoption of another currency as national currency (dollarization) – schemes allowing for great flexibility are probably the desirable solution.
Floating currencies of major industrialized countries are likely to remain a pillar of the international monetary and financial system. While the entry into force of the euro in January 1999 was another step in the evolution of the system, the European Central Bank has a clear mandate: to anchor monetary policy on internal price stability rather than on the rate of exchange. It is also possible that, in the face of the growing integration of financial markets, many medium-sized industrialized countries continue to prefer a market-determined floating rate regime; however, in the long run, an increasing number of countries could join a stronger stowage system. In these conditions, the future looks as follows:
Exchange rates of the euro, yen and dollar will probably remain volatile and this volatility will not be mitigated by measures that are unlikely to be adopted or desirable because they prevent systematically internal stabilization;
- It is likely that several transition countries in central and Eastern Europe, particularly those preparing to join the European Union, are seeking to gradually introduce rules of discipline and institutional requirements for later adoption of the euro.
The IMF remains committed to informing its members about the advantages and disadvantages of various exchange rate regimes, considering that each country is free to choose the appropriate exchange rate regime and to provide advice consistent with the regime.