Assignment Essay Example | Topics and Well Written Essays - 3000 words

Assignment - Essay Example You will find that the currency policy can have an effect on the stability of a country's economy. Attached you will find the evaluation of the foreign currency regimes utilised by some of the major countries in the Asian region. Australia and Indonesia operate on a free floating regime, whereas Hong Kong is pegged at a fixed rate to the US dollar and China and Malaysia operate a managed float system. Their central banks have operations details in line with their government's monetary policy. A detailed analysis explains that each regime has strengths and weaknesses; however the pegged exchange rate system has the most drawbacks and the most potential for economic crisis. A free floating system allows a currency to be valued purely by the market however it relinquishes control of the central bank to the world market. A managed float allows for more control over the market and greater currency stability however it has some of the drawbacks of a pegged rate system. The appendices outline currency volatility given the type of exchange rate as well as the strengths and weaknesses of each type of currency regime. There are a variety of exchange rate mechanisms that a country can choose to use in order to value their currency. Each mechanism has its own strengths and weaknesses and each country creates an exchange rate policy that they feel will help to keep their currency stable. Since the currency crisis of 1997 in the Asia Pacific region, many countries in this region have revised their monetary policies away from a strictly pegged exchange rate system. Pegged exchange rate systems seek to tie the value of one countries currency (usually a less stable economy) to that of the currency of a country with a very stable economy. However it can be difficult for a country to maintain this peg in times of economic crisis. More countries are now moving towards floating or managed exchange rate systems. Floating exchange rate systems allow a currency's value to be determined by the market, in other words to float freely in relation to other traded currencies. A country that does not have a stable ec onomy may be hesitant to use this method as their currency may be severely devalued in an open market. Managed float systems are a hybrid of a pegged and floating system. In a managed float a country lets its currency float in the market, but only allows it to float within an accepted range compared to other currencies. Outlined below are the exchange rate mechanisms and operations employed by several countries in the Asian region, as well as an analysis of the strengths and weaknesses of the different mechanisms utilised. 2. Country Specific Exchange Rate Regimes 2.1 Australia The Reserve Bank of Australia maintains a floating exchange rate policy. The goal of their policy is, "the stability of the currency of Australia, the maintenance of full employment in Australia, and the economic policy and welfare of the people of Australia (Reserve Bank of Australia 2006, para. 2). Overall the Australian government is concerned with keeping inflation rates low. The Reserve bank of Australia is the institution charged with maintaining the exchange rate pol