Exchange Rate Regime – Fixed and Floating exchange rate regimes
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Exchange rate regime has often been likened to monetary policies and it may be concluded that both the processes are actually dependent on a lot of similar factors.
There are some basic exchange rate regimes that are used nowadays – the floating exchange rate, the pegged float exchange rate and the fixed or pegged exchange rate. In case of the floating exchange rate regime, the values of the currencies are influenced by the movements in the financial market.
The floating rates are extensively used in most countries of the world. Some common examples of the floating exchange rates would be the British pound, United States dollar, Japanese Yen and Euro.
The floating exchange rate regime is also known as a dirty float or a managed float. This is because the governments always step in to address any excesses in the changes of value.
There are three types of pegged floats – the crawling bands, pegging with horizontal bands and crawling bands. In case of the crawling bands the rate is permitted to fluctuate within a particular band or limit and the movements are based on a particular central value. This central value is adjusted at definite periods. The entire exercise is performed in a controlled manner. In case of the crawling pegs the rates of exchange stay fixed. In case the rates are pegged with horizontal bands the rate would be allowed to move within a specified limit or band, which is 1% more than the band.
In case of the fixed exchange rate regimes or the pegged exchange rate, as it is also known, the rates are meant to be converting directly to some other currency. At times, in case of the pegged exchange rate, the currency may be attached to a group of currencies or even precious metals like gold.
