exchange rate regime

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.

• 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.

• 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.

• The American Dollar and the World Economy

  • As global trade has grown, so has the need for international institutions to maintain stable, or at least predictable, exchange rates.
  • This system resulted in fixed exchange rates -- that is, each nation's currency could be exchanged for each other nation's currency at specified, unchanging rates.
  • Fixed exchange rates encouraged world trade by eliminating uncertainties associated with fluctuating rates, but the system had at least two disadvantages.
  • 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.

• Glossary

  • Discount rate: The interest rate paid by commercial banks to borrow funds from Federal Reserve Banks.
  • Exchange rate: The rate, or price, at which one country's currency is exchanged for the currency of another country.
  • Fixed exchange rate system: A system in which exchange rates between currencies are set at a predetermined level and do not move in response to changes in supply and demand.
  • Floating exchange rate system: A flexible system in which the exchange rate is determined by market forces of supply and demand, without intervention.
  • Managed float regime: An exchange rate system in which rates for most currencies float, but central banks still intervene to prevent sharp changes.

• Introducing Exchange Rates

  • In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
  • In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or 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.
  • Explain the concept of a foreign exchange market and an exchange rate

• Executing Expansionary Monetary Policy

  • Monetary policy is based on the relationship between money supply and interest rates, where the interest rate is essentially the price of money.
  • In an expansionary policy regime, the Fed would reduce the reserve requirement.
  • The interest rate on the overnight borrowing of reserves is called the Federal Funds rate or simply the "fed funds rate."
  • The Fed does not control this rate directly but does control the interest rate indirectly through open market operations.
  • In an expansionary policy regime, the Fed purchases government securities from a bank in exchange for cash.

• Executing Restrictive Monetary Policy

  • Monetary policy is based on the relationship between money supply and interest rates, where the interest rate is the price of money.
  • In a contractionary policy regime, the Fed would increase the reserve requirement, thereby effectively restricting the funds that banks have available for loans.
  • The interest rate on the overnight borrowing of reserves is called the federal funds rate or simply the "funds rate."
  • The Fed does not control this rate directly but does control the interest rate indirectly through open market operations.
  • In a contractionary policy regime, the Fed sells government securities from a bank in exchange for cash.

• Real Versus Nominal Rates

  • Real exchange rates are nominal rates adjusted for differences in price levels.
  • An exchange rate between two currencies is defined as the rate at which one currency will be exchanged for another.
  • The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices.
  • The real exchange rate is the nominal exchange rate times the relative prices of a market basket of goods in the two countries.
  • In this case, the real A/B exchange rate is 3.