... has a constant value. If fiscal policy is the main tool used to establish economic stability rather than monetary strategy, a fixed exchange rate will be easier to introduce. Similarly a fixed exchange rate is also more suited to economies where foreign trade makes up a large percentage of GDP. A fixed exchange rate might reduce currency speculation, preventing fluctuations in import and export levels. The choice of an optimal exchange rate is clearly dependent on the size of the economy in question and its dependence on foreign trade. Speculation is perhaps the biggest danger when a fixed parity is in use. An effective example would be the UK's difficulties in supporting the ERM in 1992. Although it was a target zone set against the DM rather that a fixed currency regime, there was little confidence that the pound was at its correct value. George Soros, a large investor in ...

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