Long-run Determinants of Exchange Rates Essay Example | Topics and Well Written Essays - 3000 words

Long-run Determinants of flip-flop Rates - Essay Example there are several factors that are responsible in ascertain interchange compute in any country. Exchange rates show the value of a countrys up-to-dateness through which it can buy other countrys currencies. Every country needs stable foreign supervene upon rate to business freely. Exchange rate may get affected through various things. There are two regimes with respect to deepen rate which can either be fixed or flexible. In fixed exchange rate regimes, the bills rates do not move freely. However, in flexible exchange rate system, the currency rates are affected by a rate of variables prevailing in an economy. The macroeconomic factors that affect exchange rates are variable by constitution and thus play a great role in determining exchange rates. Governments and Central Banks in particular utilize these macroeconomic factors to maintain a desired level of exchange rate in the economy. These macroeconomic factors ma y lead to great fluctuations in exchange rates both in short and presbyopic run. The factors that determine exchange rate in the yearn run include imports/exports, monetary shocks, inflation, demand/ tot up pressures, foreign reserves, economic productivity and government spending etc. The study of factors determining exchange rate in the long run is important so as to understand the reasons for which the currency rates prize or depreciate.This paper shed light on the factors determining exchange rates in the long run and evaluates these exchange rate determinants. It elaborates and gives comprehensive understanding of factors that can showcase the value of a currency to fluctuate. DETERMINANTS OF EXCHANGE RATE IN LONG RUNExchange rates greatly signify a countrys overall economic position and trading prospects. These rates depict a countrys position in scathe of its currencys price with respect to that of the other. These are mainly the rates at which currencies could be bought and sold. Exchanges rates have a great impact on other economic variables of a country such as specie supply, trade growth, imports, exports and interest rates etc. In the same vein, there are several factors that cause fluctuations in a currencys exchange rates. These determinants of foreign exchange rates may be external or internal and tend to play a great role in causing changes to currency rates. around of these factors either take place in the short run while several cause exchange rate fluctuations in the long run. The rest of the paper elaborates and evaluates the various determinants of currency exchange rate in the long run.Exports and ImportsCountries having fewer imports and more exports usually have high exchange rates. In the same fashion, countries having a lower tendency to export and have imports tend to have trade deficits. Current account surfeit and deficit play a significant role in determining exchange rate of a particular country. The elements form crucial elements of a countrys GDP. Balance of payment in the receipt side shows the trade surplus and thus puts the positive impacts on exchange rate while the balance of payment in the payment side reflects the trade deficit or loss which puts the negative impact on exchange