Exchange rate regime

Presented by: Gaudencio Membrere

Content

• Definition
• Floating and fixed exchange rate systems
• Common opinion
Definition
An exchange-rate
regime is the way an
authority manages its
currency in relation to
other currencies and the
foreign exchange market. It
is closely related to
monetary policy and the
two are generally
dependent on many of the
same factors.
 The basic types:
•A floating exchange rate;
•A pegged float;
•A fixed exchange rate.
Floating and fixed exchange rate systems

A floating exchange rate

or fluctuating exchange rate is a
type of exchange-rate regime in
which a currency's value is
allowed to fluctuate in response
to market mechanisms of the
foreign-exchange market.
Pegged floats are:
•Crawling bands – when the rate is allowed to
fluctuate in a band around a central value, which is
adjusted periodically.
•Pegged with horizontal bands – when the rate is
allowed to fluctuate in a fixed band (bigger than
1%) around a central rate.
 A fixed exchange rate (pegged exchange rate), is
a type of exchange rate regime where a currency's
value is fixed against the value of another single
currency, to a basket of other currencies, or to another
measure of value, such as gold.
 This belief that fixed
rates lead to stability is only
partly true, since speculative
attacks tend to target
currencies with fixed
exchange rate regimes, and
in fact, the stability of the
economic system is
maintained mainly through
capital control.
 Capital controls are residency-based measures such
as transaction taxes, other limits, or outright prohibitions
that a nation's government can use to regulate flows from
capital markets into and out of the country's capital
account.
A fixed exchange
rate regime should be
viewed as a tool in capital
control.
Common opinion
• Floating exchange rates are preferable to fixed
exchange rates.
• As floating exchange rates automatically adjust, they
enable a country to dampen the impact of shocks
and foreign business cycles, and to preempt the
possibility of having a balance of payments crisis.
 Hybrid exchange rate
systems have evolved in
order to combine the
characteristics features of
fixed and flexible exchange
rate systems. They allow
fluctuation of the exchange
rates without completely
exposing the currency to the
flexibility of a free float.