International Finance

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International Finance

“Countries with pegged exchange rates are able to grow faster than countries with floating exchange rate”

Introduction
Exchange rate is a term which is defined by the two components that include the domestic currency and a foreign currency. It’s a price for which the currency of a country can be exchanged for another country’s currency. There are two types of exchange rates, Fixed or pegged exchange rate and floating or fluctuating exchange rate. A floating exchange rate is describes as a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market. The currency is known as floating currency if it is using a floating exchange rate system. The dollar is a great example of a floating currency. The rate or the price of a currency in floating exchange rate is determined by the simple rule of demand and supply in the foreign exchange market. The currency is free to fluctuate according to the changes in demand and supply of foreign currency. On the other hand fixed or pegged exchange rate is another type of exchange rate in which the price of exchange of a currency is fixed or pegged in terms of gold or another currency. There is complete government control in fixed exchange rate system as only government has the power to change it.
The economists founded by the annual observations for 183 countries over the period of 1974 to 2000, using a long run Gross Domestic Product growth equation regarding the standard factors explaining differences in GDP growth per capita, such as initial GDP, Education, openness, and government spending. The economists with their past findings happen to find that economies with flexible exchange rates grow more rapidly than those with the fixed exchange rate regimes. The difference in the rate of growth of Gross Domestic Product per capita is substantial,…...

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