202409271848 Status: #idea Tags: #monetary_policy #economics #politics # Fixed nominal exchange rates A fixed nominal exchange rate is a system where a country’s currency value is pegged to another major currency, a basket of currencies, or a commodity like gold. In this system, exchange rates between countries are fixed in nominal terms (eg. $1 = 1 £). However, real exchange rates change with inflation & deflation. For example, if the dollar deflates so that $0.9 can buy a typical basket of goods (where $1 could previously) while the British pound experience no inflation or deflation, then to buy a basket of goods from Britain as an American is now $1.0/0.9 \approx 1.11 = 11\%$ more expensive than buying the same basket domestically. As such, Britain’s exports become *less* competitive in America due to deflation. That is, in this system, deflation in one country makes *other countries’ exports* less competitive. By the same token, inflation in a country makes its own exports less competitive. In order to make Britain’s exports more competitive in America in this example, the British government would need to implement its own deflationary policies in order to reestablish the former real exchange rate. This is the reverse of the current monetary system, the [[Floating exchange rate system]], where deflation in one country makes its own exports less competitive (or equivalently, inflation in one country makes its own exports more competitive). --- # References