The paper "Exchange Rate System " is a great example of a finance and accounting assignment. The vulnerability towards the crisis becomes an important determinant that might drive policymakers towards choosing a specific exchange rate system. The financial crisis in the earlier times, more specifically during the 1990s was exposed towards being susceptible to different kinds of exchange rate regimes crisis. Such a crisis was associated with the large volumes in capital flows under the strong forces of a globalised world. With the increased mobility of the capital, most of the regimes that came in the intermediate times were considered to be prone to the crisis.
Exchange rates that are pegged have been considered to be vulnerable to speculative flows of capital within nations. The government and the banking system determine the flow of foreign currencies. However, conventional wisdom states that countries which operate on a currency system of fixed exchange rate are less prone to the crisis primarily because of the features of stabilisation from the viewpoint of defending the exchange rates. Attention has also been drawn towards the recent cases of speculative attacks on currency boards of Hong Kong and Argentina (Feenstra and Taylor, 2014).
This task of defending the exchange rate has been extremely expensive for those facing situations of recession and unemployment. Such currency boards turn out to be more effective in defending the exchange rates. While discussing the flexible exchange rate system and its vulnerability to the exchange rate crisis, the free-floating exchange rate system appears to be strongly established ad providing very little or no room for the attack of any crisis situation caused by speculative attacks on the money.
Hence, one can state that the free-floating system of the exchange rate is less vulnerable to crisis situations. Under the system of managed floating exchange rates, the advantage of lack of any formal commitment towards pegging the exchange rates allows the nation to remain invulnerable to crisis situations. A peg that comes about unannounced can be easily adjusted with the pressures experienced from the market while a minor crisis can be managed by pegging adjustments.
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