Fixed exchange rates provide discipline for macroe...
An argument frequently put forward in favor of fixed exchange rates is that the commitment to such a regime provides a degree of discipline to domestic macroeconomic policy that is absent if exchange rates are allowed to float.In a fixed rate regime, the pursuit of reckless macroeconomic policies (such as excessive monetary growth)will lead to pressure for a devaluation of the currency and a fall in their reserves.If the pressures continue, the authorities would eventually have to devalue the currency which would be taken as a sign by economic agents of mismanagement of the economy.Such an unpleasant scenario should encourage government to resist adopting unsound expansionary macroeconomic policies which they are invariably tempted to undertake prior to elections and in their attempts to reconcile conflicting demands.