A globalized economy in its theory entails opening up of the local economy of a certain country towards internationalization, creating a “borderless world economy”. Thus, ideally, it should pave the way for economic interdependence and promote economic fair play amongst participating countries. Globalization shall surely expose an economy towards the world market due to increased amount of global trade and exchanges in products and services and by encouraging application for an open-economy.
Globalization has imposed too many changes on the international monetary policies.
On the other hand, international monetary has seriously influenced trade and investment policies, finance, tourism and many other aspects that are coincided with the modernity imposed by globalization. Moreover, open-economy principles have profoundly affected exchange rate policies on the macro level. Thus, international economic migration has increased exposure towards international financial changes and commercial flows. (Frieden, p. 1)
Moreover, according to Betts and Kehoe (2004), the aggregate real exchange rate movements are believed to be influenced by inter-country movements with regards to the relative prices of their traded goods within countries.
Also, the currency denomination of international trade widely influences the trade prices of goods and services. Thus, it also turns out that changes or fluctuation in the on currency will decrease the buying power of a particular currency if compared to other currencies that have less amount of fluctuations in their market.
In addition, the strong market competitors in this case, are those who are believed to have strong economic relations with participating countries, thus they carry an edge towards their trade practices. Nevertheless, they don’t act to stabilize world exchange rates, rather they only work to provide balance of trades and multi-lateral interaction amongst participating nations. There are several factors that affect the bilateral rate movements which have significant economic effects.
According to the Reserve Bank of Australia Bulletin (RBAB) (1998, p. 2) These are: (1) divergences between export and import and aggregated trade-weighted exchange rates; (2) role of US dollar as currency for international trade; (3) longer-term pricing of commodity exports in terms of other major currencies; and (4) importance of bilateral rates vis-a vis competitor countries with relatively little direct trade. These changes however, the depreciation or appreciation can create effects on international competitiveness.
Moreover, aside from purely economic reasons of rate fluctuations, the political side behind changes in the market activity is also significant. This political-economic aspect is important most especially amongst developing nations. The emergence of developing countries and the continuing influence of strong countries amongst less empowered countries create domestic and international political pressures that are integral to the competitiveness of the participating countries (Freiden, p. 12)
Thus, economically speaking, exchange rate fluctuations have impacts on the country’s competitiveness. Stability or non-stability of their currency has adverse effects on the currency’s buying and trading power. On the political aspect, excluding the changes and fluctuations in the currency rates, powerful groups and powerful consumers affect international economic integration. And thus the openness of world economy therefore pushes more politicized movements and political pressures in the economic arena.