Theoretical debate on the choice of exchange rate regime: A review of the fixed-flexible opposition

Abstract

The choice of the exchange rate regime occupies an important place in contemporary economics because of the role that the exchange rate plays in the management of economic policy as a tool for decision-making. The literature and empirical studies show the existence of correlations between the exchange rate regime, inflation, economic growth and crises.

The optimal exchange rate regime depends on the study of the effect of the exchange rate on macroeconomic variables, which differ from country to country depending on economic policy, the size and strength of the state, in addition to the long-term impact related to structural competitiveness and the dynamics of the real exchange rate and its relationship with the cost of production (wages, technological development) and external competitiveness.

The choice of the exchange rate regime is an important theoretical issue in international finance. Based on a review of the theoretical debate on the choice between fixed, floating and intermediate exchange rate regimes, this paper argues that the choice of the exchange rate regime is a dynamic system influenced by a variety of factors and variables, and that the choice of the exchange rate regime is a matter of discretionary choice in the specific circumstances of a country. The most important aspect of an exchange rate regime is its degree of flexibility. The issue is more complex than a simple choice between fixed and floating exchange rates. The importance of the study lies in the fact that the problem of the optimal exchange rate regime is one of the complex and modern problems related to international finance, which requires many studies to understand and provide solutions necessary to ensure the best economic performance. The objective of this article is to take a theoretical look at the factors explaining the choice of the exchange rate regime.

JEL Classification : F3.

Paper type : Theoretical Research.