Final answer:
Short-term forecasts for fixed exchange rates tend to predict stability, while long-term forecasts consider potential economic adjustments. Floating exchange rates are more unpredictable in the short term due to market influences but may stabilize in the long term with sound monetary policy. Each system has its trade-offs between predictability and policy flexibility.
Step-by-step explanation:
The major differences between short-term and long-term forecasts for fixed exchange rates vs. floating exchange rates relate to the level of predictability and control that a country's monetary authority can exert over its currency's value. In the context of a fixed exchange rate system, a short-term forecast might expect relative stability since the rates are pegged to another currency or a basket of currencies. The long-term forecast might need to consider potential adjustments or alignments to the fixed rate due to market pressures or changes in the economy. However, this system restricts the ability to use monetary policies to adjust the relative price of a currency for economic objectives.
On the other hand, a floating exchange rate system allows the currency's value to fluctuate according to market conditions. Short-term forecasts in such a system can be unpredictable, influenced by numerous factors including monetary policy, inflation, and speculation. Long-term forecasts might center around economic fundamentals and policy trends. Milton Friedman, a prominent economist, supported floating exchange rates, emphasizing that with stable and predictable government policies, including a central bank's focus on preventing high inflation or deep recession, exchange rates would be more stable as well.
Each system has its pros and cons: a fixed exchange rate regime may stabilize trade flows but can result in output or employment losses, while a floating exchange rate can be unpredictable but allows for more flexibility in domestic monetary policy.