The Jamaican dollar has been consistently depreciating against the US dollar.

In light of this, many people think Jamaica should use a Fixed Exchange Rate.

Do you agree?

Introduction
In light of the Jamaican economy, a fixed exchange rate is the best solution to our present economic woes. What is a fixed exchange rate? According to answers.com; This is a countrys exchange rate regime, under which the Government of the Central Bank ties the official exchange rate, to another countrys currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a countrys currency value within a very narrow band. Also known as, Pegged Exchange Rate. Fixed rates provide greater certainty for exporters and importers. This also helps the Government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment. Many economists have argued that fixed exchange rate regimes provide more fiscal discipline, much of the work on exchange rate regimes have focused on the effectiveness of stabilization policy under different regimes (Robinson 1998), Mundel (1962), Fleming (1963), Marston (1985) but few have compared the actual performance of economies operating under these different regime types. Ghosh, Gulde, Ostry and Wolf (1997) and Tornell and Velasco (1995) are among the small number of authors who have investigated the issue in a formal analytical framework. In particular, there has been precious little work on the degree of fiscal disciple under different exchange rate regimes. This has been the case in spite of a great deal of informal discussion on the link between exchange rate regimes and fiscal discipline. In the Caribbean, the situation is no better. Only work by Rolle (1994) and Anyadike Danes and Francis (1993) touch on this issue in a region that has had more than its fair share

experimentation with the exchange rate regime. The fact that fiscal imbalance, manifest themselves so quickly in balance of payments problems in the region and the ongoing debate about macroeconomic performance under different regimes. In Jamaica however according to our Minister of Finance Audley Shaw, we are not earning enough foreign exchange. We had projected to earn six (6) billion dollars in revenue this year, and it is down by almost half, therefore foreign exchange earnings are also down he admitted (excerpt from a speech on Saturday, February 21, 2009). Hence, this research paper will give empirical data that a fixed exchange rate system should be used by Jamaica to ensure stability of the exchange rate and this will result in consistent economic growth for the country. These are the positive results of having a fixed exchange rate:

Advantages/ Benefits of the Fixed Exchange Regime

Fixed exchange systems are most appropriate when a country needs to force itself to a more prudent monetary policy course which Jamaica needs. A fixed exchange rate should reduce uncertainties for all economic agents in the country. As businesses have the perfect knowledge that the price is fixed and therefore not going to change they can plan ahead in their productions. Inflation may have a harmful effect on the demand for exports and imports, to ensure that inflation is kept as low as possible, the Government is forced to take measurements to keep businesses competitive in foreign markets.

A fixed exchange rate should also reduce speculations in foreign markets, speculation flows can be very destabilizing for an economy and the incentive to speculate is very small when the exchange rate is fixed. Reduced risk in international trade, by maintaining a fixed rate, buyers and sellers of goods internationally can agree a price and not be subject to the risk of later changes in the exchange rate before contracts are settled. The greater certainty should help encourage investment. Introduces discipline in economic management as the burden or pain of adjustment to equilibrium is thrown onto the domestic economy then governments have a built-in incentive not to follow inflationary policies, if they do then unemployment and balance of payments problems are certain to result as the economy becomes uncompetitive. Stable currency exchange rate regimes are key components to stable economic growth. The Central Bank is dedicated to using monetary policy to maintain the exchange rate at a predetermined price. This will also allow for expanded employment opportunities. In order to maintain the rate, the Central Bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the Central Bank which it can release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation / deflation), and ultimately, the exchange rate. The Central Bank can also adjust the official exchange rate when necessary.

Literature Review
The Foreign Exchange Regime is a system used to control and stabilize the economy in some world states. What this means is that a countrys exchange rate under which the government ties the official exchange rate to the rate of another country or peg to the price of gold. Although, not a system commonly used to control economic worries, its purpose is to maintain a countrys economic value within a narrow brand. Take for example China in the 1990s during a economic melt down due to the fall of the Soviet Union, the Chinese fixed its rates and pegged itself to the United States Dollar. This helped the country to balance its payment and stabilized its economy and rise to prosperity. Today, China is seen as a powerhouse in production and manufacturing. Such economic success was also visible in Western European States who maintained a certain degree of economical stability by pegging themselves to the United States dollar. Under the fixed exchange rate regime trade between countries are much more meaningful where both importers and exporters benefit from one flat rate. This will enable the government to control spending: its balance of payment deficit and surpluses. That is, if the Central bank purchases more domestic currency and sells less foreign currency in private FOREX, this will result in a balance of payment deficit and vice versa. Although with records of success many countries today chose the route of a floating exchange rate. One of the main differences between a fixed exchange rate system and a floating system is that under fixed exchange rates the central bank will have to intervene periodically. In contrast,

in a floating system, the central bank can just sit back and watch since it has no responsibility for the value of the exchange rate. In a pure float at least, the exchange rate is determined entirely by private transactions. However, in a fixed exchange rate system the central bank will need to intervene in the foreign exchange market, perhaps daily, if it wishes to maintain the credibility of the exchange rate. So, by fixing the exchange rate the government would have declared illegal any transactions that do not occur at the announced rate. However, it is very unlikely that the announced fixed exchange rate will at all times equalize private demand for foreign currency with private supply. On the contrary, in a floating exchange rate system, the exchange rate adjusts to maintain the supply and demand balance. In a fixed exchange rate system it becomes the responsibility of the central bank to maintain this balance by acting as a buyer and seller of currency of last resort. Conversely, we might consider what would happen if the central bank did not intervene. Surely the government could simply mandate that all foreign exchange transactions take place at the official fixed rate and implement severe penalties if anyone is caught trading at a different rate, a black market rate (i.e. where transactions for foreign currency take place at an unofficial (or illegal) exchange rate). Therefore, stringent measures must be auctioned in order to patrol and maintain order in the financial world. Such measures would include adjustments to monetary and fiscal policies to accommodate the exploitation of the benefits associated with a Fixed Exchange Regime to avoid any volatile reactions in the market.

Probably the best reason to adopt a fixed exchange rate system is to commit to a loss in monetary autonomy. This is necessary whenever a central bank has been independently unable to maintain prudent monetary policy leading to a reasonably low inflation rate. In other words, when inflation cannot be controlled, adopting a fixed exchange rate system will tie the hands of the central bank and help force a reduction in inflation. Of course, in order for this to work, the country must credibly commit to that fixed rate and avoid pressures that lead to devaluations. Several methods to increase the credibility include the use of currency boards and complete adoption of the other country's currency (i.e., dollarization or euroization). Nonetheless, even when countries commit with credible systems in place, pressures on the system sometimes can lead to collapse. Argentina, for example, dismantled its currency board after 10 years of operation and reverted to floating rates. In Europe, economic pressures recently have resulted in "talk" about giving up the Euro and returning to national currencies. The Bretton-Woods system lasted for almost 30 years, but eventually collapsed. Thus, it has been difficult to maintain a credible fixed exchange rate system for a long period of time. However, as previously stated not many countries have adopted this type of system. In fact most countries chose the route of having a floating rate system. Bar you though, is practicing economic maintenance using a floating rate more beneficial that a fixed exchange rate? This assignment seeks to highlight the advantages and reasons for utilizing a fixed rate economic tool to monitor, develop and grow the Jamaican economy into one that is healthy, wealthy and significant.

Should Jamaica return to use a Fixed Exchange Rate?

Countries have been experimenting with different international payment and exchange systems for many a years. In early history, all trade was barter exchange; goods were traded for other goods. Eventually, scarce or precious commodities, for example gold and silver, were used as a medium of exchange and a method for storing value. This practice evolved into the metal standards that prevailed in the 19th and early 20th centuries. By default, since gold and silver standards imply fixed exchange rates between countries, early experience with international monetary systems was exclusively with fixed systems. Fifty years ago, international textbooks dealt almost entirely with international adjustments under a fixed exchange rate system since the world had had few experiences with floating rates. The exchange rate is one of the key international cumulative variables studied in an international finance course and so the exchange rate system is one of the key policy questions to be answered. That experience of a fixed exchange rate changed dramatically in 1973 with the collapse of the Bretton-Woods fixed exchange rate system. At that time, most of the major developed economies allowed their currencies to float freely, with exchange values being determined in a private market based on supply and demand, rather than by government decree. Although when Bretton-Woods collapsed, the participating countries intended to resurrect a new improved

system of fixed exchange rates, this never materialized. Instead countries embarked on a series of experiments with different types of fixed and floating systems.

For example, the European Economic Community (now the EU) implemented the exchange rate mechanism in 1979 which fixed each others' currencies within an agreed band. These currencies continued to float with non-EU countries. By 2000, some of these countries in the EU created a single currency, the Euro, which replaced the national currencies and effectively fixed the currencies to each other immutably. Some countries have fixed their currencies to a major trading partner, others to a basket of currencies comprised of several major trading partners. Some have implemented a crawling peg, adjusting the exchange values on a regular basis. Others have implemented a dirty float where the currency value is mostly determined by the market but periodically the central bank intervenes to push the currency value up or down depending on the circumstances. Lastly, some countries, like the US, have allowed an almost pure float with central bank interventions only on rare occasions like now in the time of a recession. Of course, no one system has operated flawlessly and as a matter of fact some economies are far more volatile than others mainly because of culture and value and rarely mission. Nonetheless, in further examination of the data gathered, a Fixed Exchange Rate Regime would be the best thing for Jamaica. Throughout history it has proven that during a time of financial crisis pegging currencies to attain one rate is the solution for financial revival.

Examples of this were seen during the financial crisis in Asia during the year 1997, when the Chinese renminbi and the Malaysian Ringgit were able to come out of critical financial crises. The Chinese renminbi fixed its rate and the Malaysian Ringgit pegged itself to the US dollar, which helped revive its economic fortunes. There is a further evidence of the stability offered by the Bretton Woods System that allowed the Western European economies to retain a certain degree of economic stability by pegging themselves to the United States dollar. It is also important to note that China was once a member of the communist regime once headed by the Great Soviet Empire. It should also be noted that most countries that form the European Economic Community as well as those who have become users of the Euro, such as Kosovo, Montenegro, Slovakia and Slovenia were also an arm of the old soviet union that perform well up to the point of the cold war where the economy could not stand on its own. Outside of that though, in the 1980s, the Jamaica Labour Party under the leadership of The most Honourable Edward Seaga, Jamaicas economy looked promising and bright. They had adopted the regime of a Fixed Exchange Rate which pushed for stringent monetary and fiscal policies to monitor the flow inflow and out flow of capital and foreign exchange to and from the island. Interestingly to note though, it turns out, that the key to success in fixed rates hinges on prudent monetary and fiscal policies where it is chosen to force a more prudent monetary policy. A cautious monetary policy is most likely to arise when two conditions are satisfied. First, the central bank, and the decisions it makes, must be independent of the national government which makes government spending decisions. If it is not, governments have always been inclined to print money to finance government spending projects. This has been the primary source of high

inflation in most countries. The second condition is a clear guideline for the central bank's objective. Ideally, that guideline should broadly convey a sense that monetary policy will satisfy the demands of a growing economy while maintaining sufficiently low inflation. When these conditions are satisfied, mandating a fixed exchange rate can work well, but only if the system can be maintained, and if the country to which one fixes ones currency has a sensible but firm monetary policy. This programme proved to be a success in the past so why not pursue but with more force, a greater vision, extensive support from public and private sector and an abundance of confidence?

Comparison Mexico had their rates fixed in the 1980s to stabilize their economy and help bring stability to the devaluation of their currency and it was successful. The most extreme and convincing method for a country to fix its exchange rate is to give up ones national currency and adopt the currency of another country. In creating the Euro-zone among twelve of the European Union countries, these European nations have given up their own national currencies and have adopted the currency issued by the European Central Bank. Since all countries now share the Euro as a common currency, their exchange rates are effectively fixed to each other at 1-1 ratio. And surely in the mid 1980s under the leadership of the Most Honourable Edward Seaga, our own Jamaican Dollar was fixed at a rate of $5.50 JA to $1.00 US$, this model was used to stabilize the ailing Jamaican economy and it was successful, so why not return to such?

Recommendation
For Jamaica to return to the Fixed Exchange Regime, there are a few steps that must be adhered to affect the move. They must possess a great deal of confidence on the capital markets and in the programme; otherwise there are chances that the entire application and programme could crash. For a process that started out very well and reported success, very common examples of such failures are Argentina and China.

The government is required to keep a sufficient amount of foreign currency reserves to facilitate sale and purchases of their currencies in the open financial markets. In case the exchange rate goes down well below the expected rate, the government purchases the domestic currency using its reserves. This leads to an increase in the price of the currency as there is an increase in the demand for the currency in the financial markets. In case the rate of exchange exceeds the expected level then the government sells its foreign reserves to create a balance it is overall capital and current accounts. At times the governments also make it unlawful to sell the domestic currency in another rate, because this has had several disastrous consequences like black marketing for example. Therefore, a block must put-up to halt the attempt by persons to create black market financing which will in turn harm the process and cripple development.

Finally, prudent planning and a seamless maintenance system put in place to adequately monitor the endurance of the Fixed Exchange Regime (i.e. adjusting the rates when required and intervening in a timely and effective fashion). Therefore, like their forefathers before the ruling Jamaica Labour Party needs to house clean and consider the that which has been showcased for many times altogether and realize that a Fixed exchange Regime is the way to go.

Conclusion
In summary, pursuing the path of a fixed exchange rate will definitely be a pot of GOLD for the economy. Based on our empirical data, having a fixed exchange rate will sustain the economy, push for careful planning and organizing, lower interest rates, boost the productive sector thereby increasing the supply to meet the demand for good and services which will also amplify spending. This also means more jobs and more small business loans to further swell the productive sector which equals economic growth in Gross Domestic Profit and foreign exchange to benefit the country and its people. Therefore, Jamaica should emphatically return to a fixed exchange rate regime.