Managed Float Regime

Examples of Managed Float Regime in the following topics:

• 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.
  • This is why a managed float is so appealing.
  • India has a managed float exchange regime.
  • Describe a managed float exchange rate and explain why countries choose managed floats

• 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.
  • 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.

• The American Dollar and the World Economy

  • Finally, the United States abandoned the fixed value of the dollar and allowed it to "float" -- that is, to fluctuate against other currencies.
  • By 1973, the United States and other nations agreed to allow exchange rates to float.
  • Economists call the resulting system a "managed float regime," meaning that even though exchange rates for most currencies float, central banks still intervene to prevent sharp changes.

• Exchange Rate Systems

  • An exchange rate regime is how a nation manages its currency in the foreign exchange market.
  • There are three basic types of exchange regimes: floating exchange, fixed exchange, and pegged float exchange .
  • These are a hybrid of fixed and floating regimes.
  • There are three types of pegged float regimes:
  • Dark green is for free float, neon green is for managed float, blue is for currency peg, and red is for countries that use another country's currency.

• 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.
  • Below are a few considerations a country needs to make when choosing a regime.
  • A free floating exchange rate increases foreign exchange volatility, which can be a significant issue for developing economies .
  • The developing countries, marked in light blue, may prefer a fixed or managed exchange rate to a floating exchange rate.

• Managing Float

  • In check clearing, bank float and customer float are present.
  • The difference between the bank float and the customer float is called negative float.
  • Float can cause marginal changes in the money supply.
  • When managing cash disbursements, a company should endeavor to increase the amount of time present in the disbursement cycle.
  • In cash management, float can be utilized to make use of cash on hand for as long as possible.

• Financing Balance-of-Payments Deficits and Surpluses

  • Unfortunately, this regime weakens a central bank's power for monetary policy.
  • Floating exchange rate regime is the easiest to maintain because a government does not intervene with its currency exchange rate.
  • Most countries use a managed float, where a government or central bank varies the interest rate to intervene in the foreign exchange market.
  • A central bank or government can finance a balance-of-payments surplus easily under a managed float system.
  • A country can have difficulties financing a balance-of-payments deficit for all exchange rate regimes.

• The Exchange Rate Regimes

  • This system is the exchange rate regime.
  • However, all exchange rate regimes share this problem.
  • Most countries use a managed float, where a government allows supply and demand to determine its currency's exchange rate, but it intervenes to achieve economic policy goals.
  • Of course, if investors are pessimistic about a government's ability to manage its exchange rate, they call this dirty float.
  • Countries using the current exchange rate regimes encourage world-wide inflation.

• Exchange Rates

  • Each country, through varying mechanisms, manages the value of its currency.
  • As part of this function, it determines the exchange rate regime that will apply to its currency.
  • For example, the currency may be free-floating, pegged or fixed, or a hybrid.
  • If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand.
  • But that system had to be abandoned due to market pressures and speculations in the 1970s in favor of floating, market-based regimes.

• International Exchange of Money

  • 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.