Question

Why do some economists claim that the most important feature of any exchange rate system is its credibility?

Answer 1

Credibility means the quality of being trustworthy . Without a trustworthy and sound exchange rate system it is not possible to build up good international trade relations . The sustainability of the system totally depends on its credibility . There should be hassel free and reliable conversion between domestic and foreign currencies in order to ensure smooth flow of goods , services and capital between countries . Exchange rate is the most important variable affecting the trade relations and hence macroeconomy of a country . Credibility of this system not only ensures smooth trading but also proper flow of foreign investments .