History shows us that attempts to fix exchange rates or create Essay

History shows us that attempts to fix central grades or create pecuniary unions between different countries usually end in failur - Essay ExampleWhile there are certainly several similarities between these experiences, the European experiment must be viewed in its broader political and administrative context to see that such pessimism is not entirely warranted. The failure of monetary cooperation was partly due to the vent of autonomy countries face when they agree to fix exchange rates or participate in a union. This loss of autonomy means that a country has fewer tools at its disposal to reach its innate and external respite. Different countries define the term balance differently with respect to their internal and external balance goals for instance, the German Bundesbank has historically been considered very fanfare-averse, while the central bank of Italy has generally seemed comfortable with higher inflation rates1. In normal economic times, this divergence in goals is no t a problem and countries find their fiscal tools sufficient to address short- and medium- term deviations from their internal and external balance goals. In times of crises, however, countries with a dishonor tolerance for deviation from goals may find that they require more than just their fiscal tools to address the crisis. This is especially true under fixed exchange rate regimes. When a country is facing unemployment, in increment to fiscal measures, monetary authorities might want to stimulate investment by increasing the notes supply and lowering interest rates. However, the Mundell-Fleming model shows us that under a fixed exchange rate regime (unless the nation imposes restrictions on capital mobility, such as China did until recently)2, such a ply would be ineffective because a lower interest rate would cause a capital outflow, which in turn would apply depreciating pressures on the domestic currency. To maintain the exchange rate, the central bank would hence be obli ged to buy back the very same currency that it initially supplied to the economy to encourage investment.3 Where the costs are deemed to outweigh the benefits, countries are left with three options (i) Continue to remain within the arrangement, solely act autonomously (ii) Continue to remain within the arrangement, but renegotiate the terms to address the crisis, or (iii) can to remain within the arrangement Examples of these options being exercised are numerous. For example, under the deluxe Standard, which was a fixed exchange regime between 1870 and 1914, central banks were required to adhere to the rules of the game, when there were disturbances in the price-specie flow mechanism that held the Gold Standard in place4. These rules meant that central banks would sell domestic assets while experiencing a current account dearth and buy domestic assets while experiencing a surplus. However, the urgency to bring about an external balance was mat up more sharply by countries facin g deficits, so countries often exercised the first option - which meant that the rules were frequently violate or ignored5 although to all appearances, the system was not overthrown. The southward option, often takes a form that either returns a degree of autonomy to the member countries or enhances the power of a third body to address the crisis. Examples of the second option being exercised can be found in both the history of the Bretton Woods arrangement as well as the European Monetary System (EMS). Under the Bretton Woods System, countries were required to branch their currencies to the U.S. dollar while