ABSTRACT
A fixed exchange rate system requires an international numeraire to provide a value framework within which the relative values of individual currencies may be determined. The adjustment process under fixed exchange rates, as with the gold standard, works by either financing or correcting disequilibrium in the balance of payments. Fixed exchange rates help insulate the economy against economic disturbances and thus contribute to economic stability. A system of fixed exchange rates is not necessarily self-equilibrating. The coexistence, for example, of export bottlenecks and dependence on strategic imports such as energy may contribute to a situation in which the adjustment process is unable to eliminate persistent payments deficits at prevailing exchange rates. Official intervention to support a depreciating domestic currency reduces both foreign exchange reserves and the market supply of domestic currency, since the former is used to purchase the latter in the foreign exchange market.
