1. Risk of Uncertainty:
Exchange rate is the factor by which price of one currency is expressed in terms of the other. As a result, in international transactions, a payer is exposed to an additional risk if he is to pay in foreign currency.
Similarly, the payee is exposed to an additional risk if the payment is not denominated in his home currency. A fixed exchange rate protects both the payer and the payee from such a risk.
This eliminates one of the several uncertainties associated with international transactions. Removal of this risk factor allows transactions to operate within finer margins; this, in turn, promotes international trade, and flows of capital and technology.
upload.wikimedia.org
2. Monetary and Fiscal Discipline:
Assuming that authorities are committed to maintain a fixed exchange rate, but without the use of exchange control, then they will have to practice adequate self-discipline and harmonise their monetary and fiscal policies with those of the other members of the international payments system.
ADVERTISEMENTS:
In case, they fail to do so, they may face a situation of ‘fundamental disequilibrium’, that is, a situation of continuous one-sided pressure on balance of payments.
3. Convenience:
Traders and bankers favour a fixed exchange rate for its sheer convenience and safety. There are no sudden movements to destabilise a commercial transaction.
4. Need:
There may be circumstances in which it may be advisable to pursue a policy of fixed exchange rate even if is to be maintained with an exchange control.
5. Source of Economic Benefit:
If rate of exchange is chosen by taking into account the relevant elasticity’s of demand and supply of traded goods, it can be economically beneficial.
6. Historical Relevance:
A regime of fixed rates [subject to adjustment in case of a ‘fundamental disequilibrium’] was adopted by members of the IMF and this system prevailed for over two decades.