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Bretton Woods or adjustable pegged system can be described as a “semi-fixed exchange rates system” (Carbaugh 460) that has allowed tying different currencies to each other thereby facilitating interracial financial transactions. The main advantage of the adjustable pegged system is the elimination of uncertainty and risk related to fluctuations in the exchange rate. Therefore, it is also associated with the deterrence of speculation and, as a result, reduction of the flight of capital. Another advantage of a fixed exchange rate system is the prevention of depreciation of currencies. Bretton Woods system can also attract foreign investment, encourage governments to adopt reasonable macroeconomic policies, and prevent inflation (“Fixed Exchange Rate” par. 4). However, an adjustable pegged system requires developing countries to hold adequate foreign exchange reserves. Another disadvantage of the system is that it leads to the loss of the independent monetary policy. Moreover, if a country deflates its currency in order to reduce its deficits, it could face a significant slowdown of economic growth and high rates of unemployment (“Fixed Exchange Rate” par. 6).
The post-Bretton Woods era is associated with the “deepening of financial integration among the OECD countries” (Reinert 303). The flexible exchange rate has allowed burgeoning markets to participate in global trade while exercising their monetary independence. The elimination of an adjustable pegged system has also reduced the concentration of economic power in a couple of states thus leading to a higher level of “multi-polarity of economic and political might” (Reinert 303). The deepening of global trade resulted in a significant increase in the flow of private-sector money into both rich and poor states thereby promoting their growth. However, floating exchange rates have opened the private sector to the devaluation of currencies (Reinert 304).
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