fixed exchange rate

(noun)

A system where a currency's value is tied to the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.

Related Terms

Examples of fixed exchange rate 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.
    • A fixed exchange rate regime should be viewed as a tool in capital control.
    • China is well-known for its fixed exchange rate.
    • Explain the mechanisms by which a country maintains a fixed exchange rate

  • Exchange Rate Systems

    • The three major types of exchange rate systems are the float, the fixed rate, and the pegged float.
    • A fixed exchange rate system, or pegged exchange rate system, is a currency system in which governments try to maintain a currency value that is constant against a specific currency or good.
    • In a fixed exchange-rate system, a country's government decides the worth of its currency in terms of either a fixed weight of an asset, another currency, or a basket of other currencies.
    • 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.
    • The system is a method to fully utilize the peg under the fixed exchange regimes, as well as the flexibility under the floating exchange rate regime.

  • The Importance of Trade

    • It is now much cheaper to not only operate internationally and trade with foreign partners, but also to exchange information between potential buys and sellers.
    • More efficient telecommunications, from the first transatlantic telephone cable in 1956 to the popularization of the internet in the 1980s and 1990s, have allowed companies to exchange goods more efficiently and lowered the costs of international integration.
    • In particular, the Bretton Woods system of international monetary management has shaped the relationship between the world's major industrial states and has resulted in a much more integrated system of international exchange.
    • Established in 1946 to rebuild the international economic system after World War II, the Bretton Woods Conference set up regulations for production of their individual currencies to maintain fixed exchange rates between countries with the aim of more easily facilitating international trade.This was the foundation of the U.S. vision of postwar world free trade, which also involved lowering tariffs and, among other things, maintaining a balance of trade via fixed exchange rates that would be favorable to the capitalist system.
    • Although the world eventually abolished the system of fixed exchange rates, the goal of more open economies and free international trade remained.

  • 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.
    • However, pure floating exchange rates pose some threats.
    • A floating exchange rate is not as stable as a fixed exchange rate.

  • 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.
    • Under the Bretton Woods system, central banks of countries other than the United States were given the task of maintaining fixed exchange rates between their currencies and the dollar.
    • By 1973, the United States and other nations agreed to allow exchange rates to float.

  • Exchange Rate Policy Choices

    • A free floating exchange rate increases foreign exchange volatility, which can be a significant issue for developing economies .
    • 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.
    • Explain the factors countries consider when choosing an exchange rate policy

  • The Slope of the Aggregate Demand Curve

    • Due to Pigou's Wealth Effect, the Keynes' Interest Rate Effect, and the Mundell-Fleming Exchange Rate Effect, the AD curve slopes downward.
    • As a result of Keynes' interest rate effect, Pigou's wealth effect, and the Mundell-Fleming exchange rate effect, the AD curve is downward sloping.
    • This new factor is the exchange rates, as the name implies.
    • Robert Mundell and Marcus Fleming noted that incorporating the nominal exchange rate into the mix makes it impossible to maintain free capital movement, a fixed exchange rate and independent monetary policy.
    • This concept is illustrated fairly well in this figure , where 'FE' is fixed expenditure.

  • 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

  • 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.