Abstract
In a fixed exchange rate system, where the authorities intervene in the foreign exchange market to maintain a given parity rate, any disturbance to a country's external position would be reflected in fluctuations in the balance of payments. Thus, with such a system, the focus of attention would be on the behavior of the balance of payments. This chapter discusses the main theoretical approaches to balance of payments adjustment. With a floating exchange rate system, where there is no or very little intervention by the authorities in the foreign exchange market, the exchange rate adjusts in response to market forces to equate the demands for and supplies of currencies arising from international transactions. Thus, with such an exchange rate regime, external disequilibrium would be reflected not in balance of payments fluctuations but in movements in the exchange rate; the focus of attention, therefore, would be on the behavior of the exchange rate.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call