What Is Economic Shock?

Economic shock determinism holds that the arrangement of the exchange rate system depends on different types of shocks to the economy. Yoshitomi and Shirai believe that in a small country's open economy, if the source of interference is monetary factors, such as changes in currency demand and shocks affecting price levels, then a fixed exchange rate system should be chosen; if the source of interference is mainly a substantial factor, such Changes in preferences or changes in technology that affect domestic and imported goods, then a more flexible exchange rate system should be chosen. If the source of interference comes from external shocks, a floating exchange rate system is suitable; if the source of interference comes from domestic sources, such as unstable fiscal and monetary policies, then pegging the exchange rate system is appropriate. ^[1]