Economics of the Forex Essay Example | Topics and Well Written Essays - 1500 words

Economics of the Forex - Essay Example Starting from the year 1979, the Exchange Rate Mechanism -- ERM of the European Monetary System -- EMS has played a vital role in developing the foundation of the Monetary policy strategies in Europe and it has been a very striving research in the international monetary and exchange rate cooperation of the post-Breton Woods times. There has been a radical change in the nature of ERM, which is from a very fixed exchange rate with a limited mobility of the international capital to the 'hard' exchange rate mechanism which was approved by the Basle-Nyborg agreement in 1987 (Financial Markets and European Monetary Cooperation: The Lessons of the 1992-1993 ERM Crisis)During the end of the 1980's the gratified performance of this 'hard' exchange rate mechanism earned the confidence and increased the general appeal of a more total transformation of the system which was expected to result in agreement and a happening of unification. However, during 1992 a downfall on the past achievements occ urred and also undermined the process towards European Monetary Union. Thus an ERM crisis occurred between 1992 and 1993 are said to be the most historical events in the then monetary history of Europe. Thus their source, effects and inferences are one of the most important events in the current academic and political debates through out the world.The European monetary system was formulated with two major components: namely the European Currency Unit and a fixed exchange rate system known as the Exchange Rate Mechanism. ... as to whether the 1992 Exchange Rate Mechanism crisis in UK occurred due to the European monetary system being predictable, or whether it was caused due to the rising of the international financial markets May be the answers for these questions are in relevance to debates about the international financial and economic policies through out the world. These answers could also reveal the overall economic policy and the exchange rate regimes and there role on the 1992 ERM crisis. Considering a bipolar array where the hard exchange regimes on one side which involved pegged exchange rates, currency boards, taking in of another country's currency are more demanding than the flexible rate regimes. Another major point is that there cannot be any regime that can predict and offer a complete solution to the financial and economic changes that the country will undergo. (Truman, 2002) The ERM crisis was the first of its kind in the current century in terms of both private and official monetary circulation both during the crisis and also before the crisis. It could also be said as the first kind of crisis that occurred in terms of market and financial securities, derivative instruments and the financial market dynamics in the wake of building up the crisis. In view of the ERM crisis the European exchange rate regimes continued strongly support the view of pegged exchange rate mechanism. During the crisis countries and its investors were bailed out with exceptional amounts of official financing. But after the crisis the European government followed a very stringer way of its official financial management in the years that followed. (Truman, 2002) There is always a tension that reflects in every ongoing debate on the relative roles of economic fundamentals and the behaviour of