There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen, or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.
If, for example, it is determined that the value of a single unit of local currency is equal to USD 3.00, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.
Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and thus stimulating demand for local goods and services. This in turn will generate more jobs, and hence an auto-correction would occur in the market. A floating exchange rate is constantly changing.
In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a "black market" which is more reflective of actual supply and demand may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.
In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere.
Fixed vs. FlexibleFixed advantages A fixed exchange rate should reduce uncertainties for all economic agents in the country. As businesses have the perfect knowledge that the price is fixed and therefore not going to change they can plan ahead in their productions. Inflation may have a harmful effect on the demand for exports and imports. To ensure that inflation is kept as low as possible the government is forced to take measurements, to keep businesses competitive in foreign markets. In theory a fixed exchange rate should also reduce speculations in foreign exchange markets. In reality this is not always the case as countries want to make speculative gains.
Fixed Disadvantages The government is keeping the exchange rate fixed by manipulating the interest rates. If the exchange is in danger of falling the government needs to increase interest rates to increase demand for the currency. As this would have a deflationary effect on the economy the demand might decrease and unemployment might increase. A government has to maintain high levels of foreign reserves to keep the exchange rate fixed as well as to instill confidence on the foreign exchange markets. This makes clear that a country is able to defend its currency by the buying and selling of foreign currencies. Fixing the exchange rate is not easy as there are many variables which are changing over time if the exchange rate is set wrong it might be hard for export companies to be competitive in foreign countries. International disagreement might be created when a country sets its exchange rate on a too low level. This would make a countries export more competitive which might lead to a disagreement between countries as they might see it as an unfair trade advantage.
Flexible Advantages As the exchange rate does not have to be kept at a certain level anymore interest rates are free to be employed as domestic management policies(Appleyard 703). The floating exchange rate is adjusting itself to keep the current account balanced, in theory. As the reserves are not used to control the value of the currency it is not necessary to keep high levels of reserves (like gold) of foreign countries.
Flexible Disadvantages Floating exchange rates tend to create uncertainty on the international markets. As businesses try to plan for the future it is not easy for the businesses to handle a floating exchange rate which might vary. Therefore investment is more difficult to assess and there is no doubt that excursive exchange rates will reduce the level of international investment as it is difficult to assess the exact level of return and risk. Floating exchange rates are affected by more factors than only demand and supply, such as government intervention. Therefore they might not necessarily adjust themselves in order to eliminate current account deficits. The floating exchange rate might worsen existing levels of inflation. If a country has higher inflation rate than others this will make the export of the country less competitive and its imports more expensive. Then the exchange rate will fall which could lead to even higher import prices of goods and because of cost-push inflation which might drive the overall inflation rate even more. While flexible exchange rates can ensure that the country achieves external balance, they do not ensure internal balance. In several situations the exchange rate change that reestablishes external balance can make an internal imbalance worse. If a country has rising inflation and a tendency toward external deficit, the depreciation of the currency can intensify the inflation pressures in the country. If a country has excessive unemployment and a tendency toward surplus, the appreciation of the currency can make the unemployment problem worse. To achieve internal balance, the country's government may need to implement domestic policy changes.
There are several advantages of flexible exchange rate regimes. The exchange rate does not have to kept at certain rates. They are free to get used as domestic management policies.
When the dollar is under a flexible exchange rate regime
Violation of human rights
Advantages of war: deposition of a dictatorial or unsavoury regime; economic boost of a war economy. Disadvantages of war: risk of maiming or death of combatants; destruction of combat zone.
Gabriel De Kock has written: 'Fiscal policies and the choiceof exchange rate regime' -- subject(s): Mathematical models, Fiscal policy, Foreign exchange 'Endogenous exchange rate regime switches' -- subject(s): Mathematical models, Foreign exchange, Government policy
For the common everyday citizen of Cuba, the disadvantages of living under a communist regime are terrifying. When people have to try to escape Cuba on life rafts and inflated inner tubes, it's clear there is a problem there. The one good advantage is the climate. OR if you like to smoke cigars.
I need an answer fast.......... the German system seems to be the peg
Fiscal and monetary policies under managed floating exchange rate regimes?
Jo Anna Gray has written: 'The implications of a floating exchange rate regime' -- subject(s): Foreign exchange
Imad A. Moosa has written: 'Liquidity functions in the Kuwaiti economy' 'Exchange Rate Regimes' 'Does the exchange rate regime affect expectation formation in the foreign exchange market?'
Revaluation is the opposite of devaluation. This occurs when, under a fixed-exchange-rate regime, there is pressure on a country's currency to rise in value in foreign-exchange markets.
Exchange rates are determined through supply and demand. An increase in interest rates can appreciate an exchange rate as investors convert their money into that currency to take advantage of a higher return on their money.
Currency revaluation is the equivalent of currency appreciation, except that it occurs under a fixed exchange rate regime and is mandated by the government.
His regime was a dictatorship.
The dictator's regime is about to come crumbling down.His regime was a brutal and bloody one.
They tried to immediately find a new set of exchange rates after Bretton Woods failed- it didn't relieve it much. They used a free-floating regime which is a very mixed bag of floating and fixed exchange rates.
Gordon Weil has written: 'Exchange Rates Regime Selection in Theory and Practice (Monograph Series in Finance and Economics, 1983-2)'
Stephan W. M. Schoess has written: 'The effectiveness of monetary policy under the regime of pegged exchange rates'
Argentina has a democratic regime.
J. L. S. Abbey has written: 'Study on the appropriate exchange rate regime for a competitive export led growth strategy for Ghana' -- subject(s): Foreign exchange rates, Government policy
The Tokugawa regime was removed by the Meiji regime.
My regime consists of fruit and vegetables
I need an antonym for regime any help?
The horrific regime has come to an end.Queen Victoria's regime is arguably one of the best in world history, let alone British history.The new leader promised a better regime will follow.He has a daily regime.
The North Korean regime was brought to a swift end by the rebellion.The regime in Britain was a glorious one.He decided to begin a new exercise regime.