Merits:
i. Under a fixed exchange rate regime, speculative movements of capital- one of the major causes of economic crises and instability are more or less ruled out.
ii. Variability of exchange rate is an important source of uncertainty associated with international trading. A fixed rate of exchange eliminates this source of uncertainty.
Demerits:
i. The conditions under which automatic adjustment mechanism of gold standard operate are very difficult to meet.
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ADVERTISEMENTS:
In particular, theoretical assumptions relating to highly competitive structure of the trading economies, full application of the quantity theory of money, non-interference by the authorities, and high price elasticities of both demand and supply are not found in real-life situations.
ii. The main thrust of adjustment is borne by domestic prices, income and employment etc. Stability of exchange rate is given preference over domestic stability of income and employment.
iii. Because of their poor economic strength, most developing countries find it difficult to pursue a policy of fixed exchange rates. They are often compelled to restructure their economies on account of their limited role in international trade and capital flows.
Most of them also suffer from other forms of economic weaknesses as well including, for example, institutional rigidities, insufficient foreign exchange reserves, and so on.
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iv. For ensuring economic stability and a reasonable protection from disturbances originating in foreign countries, fixed exchange rates regime requires supplementary measures by the authorities.
v. Fixed rate of exchange does not remove the basic causes of balance of payments disequilibrium particularly when the trading economies are not resilient enough and/or their markets structures are not highly competitive.