exchange rate regime

(noun)

The way in which an authority manages its currency in relation to other currencies and the foreign exchange market.

Related Terms

Examples of exchange rate regime in the following topics:

  • Fixed Exchange Rates

    • A fixed exchange rate is a type of exchange rate regime where a currency's value is fixed to a measure of value, such as gold or another currency.
    • A fixed exchange rate, sometimes called a 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.
    • A fixed exchange rate regime should be viewed as a tool in capital control.
    • China is well-known for its fixed exchange rate.

  • Exchange Rate Systems

    • An exchange rate regime is how a nation manages its currency in the foreign exchange market.
    • An exchange rate regime is closely related to that country's monetary policy.
    • A floating exchange rate, or fluctuating exchange rate, is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market.
    • Many economists believe floating exchange rates are the best possible exchange rate regime because these regimes automatically adjust to economic circumstances.
    • Crawling pegs:A crawling peg is an exchange rate regime, usually seen as a part of fixed exchange rate regimes, that allows gradual depreciation or appreciation in an exchange rate.

  • Chapter Questions

    • If a country has a fixed rate regime and experiences a balance-of-payments deficit, please explain how the country must maintain this exchange rate.
    • Furthermore, what happens if the government runs out of reserves and refuses to let the official exchange rate change?
    • If a country has a managed float exchange rate regime and experiences a balance-of-payments surplus, please explain how the country must maintain this exchange rate.

  • Exchange Rate Policy Choices

    • A government should consider its economic standing, trade balance, and how it wants to use its policy tools when choosing an exchange rate regime.
    • When a country decides on an exchange rate regime, it needs to take several important things in account.
    • Flexible exchange rates serve to adjust the balance of trade.
    • Under fixed exchange rates, this automatic re-balancing does not occur.
    • The developing countries, marked in light blue, may prefer a fixed or managed exchange rate to a floating exchange rate.

  • The Exchange Rate Regimes

    • This system is the exchange rate regime.
    • First and oldest exchange rate regime is the gold standard that started with the Greek and Roman civilizations.
    • However, all exchange rate regimes share this problem.
    • All exchange rate regimes allow one country to export a recession to another country.
    • Countries using the current exchange rate regimes encourage world-wide inflation.

  • Financing Balance-of-Payments Deficits and Surpluses

    • Exchange rate regime determines which strategies a country must undertake to finance a balance-of-payments deficit or surplus.
    • A country with a fixed exchange rate can use two strategies:
    • Floating exchange rate regime is the easiest to maintain because a government does not intervene with its currency exchange rate.
    • Government or central bank allows the exchange rate to correct any surpluses or deficits.
    • A country can have difficulties financing a balance-of-payments deficit for all exchange rate regimes.

  • International Exchange of Money

    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.
    • The spot exchange rate refers to the current exchange rate.
    • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date .
    • The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.

  • Managed Float

    • Managed float regimes are where exchange rates fluctuate, but central banks attempt to influence the exchange rates by buying and selling currencies.
    • Managed float regimes, otherwise known as dirty floats, are where exchange rates fluctuate from day to day and central banks attempt to influence their countries' exchange rates by buying and selling currencies.
    • Some economists believe that in most circumstances floating exchange rates are preferable to fixed exchange rates.
    • A floating exchange rate is not as stable as a fixed exchange rate.
    • India has a managed float exchange regime.

  • Foreign Exchange Rates

    • Many countries across the world use a flexible exchange rate regime.
    • They calculate the cross rate to determine the exchange rate for these currencies.
    • For example, the Mexican peso to U.S. dollar exchange rate is well established, while the peso-euro exchange rate is not.
    • Since the exchange rates differ, then arbitrage exists, and we can profit from the exchange rate differences.
    • It does not matter which exchange rates we calculate the cross rate from.

  • Exchange Rates

    • A foreign currency exchange rate between two currencies is the rate at which one currency will be exchanged for another.
    • Exchange rates are determined in the foreign exchange market.
    • Exchange rates can be quoted in two ways: (1) A direct quote, is to state the number of domestic units of currency per one unit of foreign currency; (2) If an exchange rate is an indirect quote, the exchange rate is stated as the number of foreign units per one unit of domestic currency.
    • The exchange rate, as well as fees and charges, can vary significantly on each of these transactions, and the exchange rate can vary from one day to the next.
    • As part of this function, it determines the exchange rate regime that will apply to its currency.