The decision to fix the exchange rate has costs, benefits, and risks.

a. Both corporations and investors benefit from predictable exchange rates.

b. Fixed exchange rates can reduce domestic inflation by importing the monetary policy of a country with low inflation.

c. Fixed exchange rate regimes are fragile and leave countries open to speculative attacks.

d. The right conditions for choosing to fix the exchange rate include:

i. A poor reputation for inflation control.

ii. An economy that is well integrated and cyclically synchronized with the one to whose currency the rate is fixed.

iii. A high level of foreign exchange reserves.

iv. A high degree of price and wage flexibility.

v. A robust banking system.