International Studies Compendium Project

Extract

Comment on this article   The exchange rate, being the relative price of different currencies, affects all kinds of economic transactions across borders, ranging from trades of commodities, to investments in foreign assets, to extensions of credit. Since money is widely regarded as a medium of exchange and a unit of account in addition to a store of value, changes in the exchange rate alter international economic transactions and the value of foreign items. International economics investigates the tradeoffs associated with different exchange rates and exchange rate policies, but political economy generally investigates what determines the policy choices concerning those tradeoffs. The policy choices have been important for all countries, from small industrial or developing economies with extensive trade and investment ties to industrial and financial powerhouses whose decisions have large implications for others. Political economy research in exchange rate policy generally focuses on three particular questions. First is the question of the exchange rate regime. The exchange rate regime is the rule a government uses to determine the value of an exchange rate. Basically, an exchange rate regime can be “fixed,” in which a government determines the value of the country's exchange rate, or it can “float,” in which currency markets determine the exchange rate. Governments can adopt ... log in or subscribe to read full text