Dirty Float Essay ⋆ Business Essay Examples ⋆ EssayEmpire

“Dirty” float, also called managed float, is the result of intervention by a nation’s government or central bank in the behavior of its currency on the foreign exchange market. Not a fixed exchange rate, in which the value of a currency is pegged in a static relationship to some other value (like gold or a specific foreign currency), dirty float refers to an otherwise floating exchange rate governed principally by market forces but occasionally guided—the waters dirtied—by corrective intervention.

When the international economy becomes uncertain and the exchange rate of a currency on the foreign exchange market fluctuates too wildly or in response to artificial influences like the actions of currency speculators, the consequences can be dire: the depreciation of the country’s currency, rising inflation, reduced economic efficiency and growth, and the necessity for greater taxes on trade and foreign investment.

Currency fluctuations can curtail the benefits of globalization by forcing a country to shutter some of the doors between it and the outside world, in order to keep the financial weather at bay. In such a volatile environment, it becomes necessary to smooth out exchange rate fluctuations through the intervention of the central bank (or some other government authority).

Central bank intervention to manage the exchange rate can be accomplished through a variety of means. To influence daily fluctuations, the central bank can buy or sell its own currency, just as central banks have bought or sold government-issued securities to affect the supply and demand of their currencies. Short and medium-term fluctuations can be dealt with by delaying the exchange receipts and payments in exports and imports, and the movement of a currency’s exchange rate can be resisted or slowed by putting restrictions on the market, like the cash reserve ratio or statutory liquidity ratio.

Furthermore, the central bank can put a ceiling on the credit extended to foreign firms, restricting the flow of currency from the country. Direct foreign investment can be limited too, restricting the flow of foreign currencies into the country, as well as domestic firms’ dependence on those currencies and thus vulnerability to foreign economic mishaps. In some cases, the central bank can limit the amount of money that domestic investors can put in overseas investments, to a similar end. Borrowing and lending operations can be managed to maintain an equilibrium in balance of payments.

The exposure and outflow of the country’s currency can also be limited by limiting the repatriation of dividends, interest, and royalty payments. Interest rates can be adjusted in order to impact the health of the currency, as they often are for other economic matters as well.

The sense and effectiveness of such manipulations is sometimes called into question. In the case of real calamities like the Asian financial crisis of the late 1990s, such intervention seemed limited in its positive impact; in the economic uncertainty of 2007 to the present, it is difficult to tell how much trouble central banks have saved their respective countries. The power of speculating hedge funds is vast and takes effect swiftly.

Bibliography:

Ann Berg, “Money’s Sordid Tale of Dirty Floats, Debasement and Doom,” Futures (v.35/11, September 2006);
Alan Greenspan, “The Roots of the Mortgage Crisis: Bubbles Cannot Be Safely Defused by Monetary Policy Before the Speculative Fever Breaks on Its Own,” Wall Street Journal (December 12, 2007);
William Greider, One World, Ready or Not (Penguin Press, 1997);
Peter A. McKay, “Scammers Operating on Periphery Of CFTC’s Domain Lure Little Guy With Fantastic Promises of Profits,” Wall Street Journal (July 26, 2005);
Gregory J. Millman, Around the World on a Trillion Dollars a Day (Bantam Press, 1995);
John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999);
Pradip Shah, “Dirty Float Begets Dirty Trade” Businessline (June 3, 2004);
Brian J. Stark, Special Situation Investing: Hedging, Arbitrage, and Liquidation (Dow-Jones Publishers, 1983).

This example Dirty Float Essay is published for educational and informational purposes only. If you need a custom essay or research paper on this topic please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.