The choice and management of an exchange rate regime is a critical aspect of economic management to safeguard competitiveness, macroeconomic stability, and sustainable development. The paper also includes a discussion of the alternative exchangerate regimes available. With the outbreak of the two world wars in 1914 and 1939, stable exchange rate regimes had gone completely haywire. Regional integration of the east asian stock markets. The optimal exchange rate and monetary regimes have been an issue of discussion since the beginning. Types of exchange rate systems financial management. When a country has its own currency as legal tender, it can choose between the three broad types of exchange rate systems.
Floating exchange rates and fiat money are only for. The model is tested versus the data in postcommunist transition countries and it is clearly shown the choice of the exchange rate regime presents an important choice for a small open economy. An empirical analysis of the exchange rate regime in the republic of macedonia. An empirical analysis of the exchange rate regime in the. Exchange rate regimes, monetary policy and inflation targeting gill hammond deputy director, ccbs bank of england. Pdf the impact of exchange rate regimes on economic. Lecture 3exchange rate regimes handelshoyskolen bi. Within the fixed exchange rate, a country can choose a rigid peg or a crawling peg. Exchange rate regimes overview and policy issues outline types of er regimes advantages and disadvantages of fixingfloating choice of er regime empirical evidence on exchange regimes classifying er regimes hard pegs dollarization use another countrys currency as sole legal tender e. The primary objective of this paper is to examine why countries in the region have shifted between fixed and more flexible regimes. The exchange rate is the price of one currency in terms of another currency, that is, the current market price for which one national currency can be exchanged for another. In contrast, nations with a history of stable currencies typically avoid fixed exchange rate regimes. An empirical assessment, journal of international money and finance, elsevier, vol. However, exchange rates can be extremely volatile in this regime.
The advantages are that the exchange rate reflects economic fundamentals at a given point in time and governments are free to adopt independent monetary and fiscal policies. The choice of an appropriate exchange rate regime for developing countries has been at the center of the debate in international finance for a long time. The exchange rate regimes between the fixed ones and the floating ones. It is important to understand terms such as foreign exchange and exchange rate as they are central to. List of countries by exchange rate regime wikipedia. An exchange rate regime is the system that a countrys monetary authority, generally the central bank, adopts to establish the exchange rate of its own currency against other currencies. Imf used to classify exchange rate regimes according to of.
Since the breakdown of the bretton woods system in the early 1970s, countries have adopted a wide variety of regimes, ranging from pure floats at one extreme to currency boards and dollarization at the other. Exchange rate regimes free online course materials. Thus, the empirical results reveal some relevant arguments that support the fix exchange regime. Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves hard currencies and gold for use in the occasional defense of the fixed rate. Our results generally support the central banks concerns that the flexibility of exchange rate regimes should be reduced in order. Based on exchange rate variability levy yayati and sturzennegger 2005. Levy yeyati and sturzenegger 2001, 2003, 2005 proposed an exchange rate regime classification based on cluster analysis to group countries according to the relative volatility of exchange rates and reserves, thereby shifting the focus. This demands primarily the use of nonmonetary instruments like fiscal policy or capital controls, but the behavioral model of the exchange rate implies that intervention can also play a role.
The paper finds that countries are more specialized under flexible than fixed rates, and that the pattern of specialization is not uniquely defined by trade models but depends also on the exchange rate regime. Annual report on exchange arrangements and exchange restrictions 2014. Oscar wilde fiscal policy is not wellsuited for stabilizing in. Other transitions have been disorderlythat is, characterized by a sharp depreciation of the currency. Before that all forms of currency exchange across boarders had imposed either coercion or commitment to guarantee the value of the currency. Ebook exchange rate regimes in the modern era mit press free read. A fixed exchange rate is an exchange rate that is set at a determined amount by government policy.
Types of exchange rates fixed, floating, spot, dual etc. At the beginning of the twentieth century the choice was obvious join the gold standard, all the advanced countries have done it. Such an exchange rate mechanism ensures the stability of the exchange rates by linking it to a stable currency itself. But countries with floating regimes are not entirely immuneas indeed the current global crisis, with its epicenter in countries with floating regimes, has amply demonstrated. Exchange rate regimes in the twentieth century download online. This is a list of countries by their exchange rate regime. In what follows we do not distinguish between an exchange rate peg and the membership in a currency union. How do alternative exchange rate regimes operate and how can. Choice of exchange rate regimes for developing countries. Exchange rate regimes exchange rate regime refers to the way the value of the domestic currency in term of foreign currencies is determined. The choice of exchange rate regimes in the mena countries. Research proposal determinants of the choice of exchange rate.
A fixed exchange rate, also known as the pegged exchange rate, is pegged or linked to another currency or asset often gold to derive its value. However, we assume throughout that the exchange rate regime is perfectly. The bretton woods system was established in 1944 and lasted for around two decades. Sahoko kaji open economy macroeconomics lecture notes iii iii4 an example of a model using the stock equilibrium approach here is an example of a simple model using the stock equilibrium approach. The exchange rate prescription, or the use of the exchange rate as a policy tool, is the idea that, in a discretionary way, the rate should be ad justed in the direction in which it is best able. Exchange rate regime choice in historical perspective. Fiscal policy and exchange rate regimes chapter subtitle or article title chapter authoranyone who lives within their means suff ers from a lack of imagination. Main types of foreign exchange rates your article library. In the last part of the second chapter i will illustrate the complex exchange rate regime of the european union. The survival of intermediate exchange rate regimes, working papers 200207, cepii research center. Research proposal determinants of the choice of exchange. Although this system worked relatively well while the u. Thus, greater crisis susceptibility is a cost of more rigid exchange rate regimes.
However, little direct attention has been paid to the consequences of the choice of exchange rate regime on financial stability, and our study was motivated by this literature gap. What is exchangerate regime the way an authority manages its currency in relation to other currencies and the foreign exchange market an exchange rate change is simply the price of one currency in terms of another 3. Exchange rate regimes research papers in economics. In theory, fixed exchange rate regimes prevent prices across countries from evolving independently, provided trade or financial barriers do not impede goods andor interest rate arbitrage. This conclusion broadens the importance of the monetary policy since it is the actual choice of the exchange rate regime which sets the economy on a. This paper considers the choices and tradeoffs an economy faces when deciding on its combination of exchange rate, monetary policy and capital account policies. We emphasise the role of the stock equilibrium in the financial market, and treat y as given at the level corresponding to full employment. Economic and financial crises in emerging market economies. Third, pegged and intermediate exchange rate regimes impede timely external. Pdf exchange rate regimes and the stability of the international monetary system read full.
Types of exchange rate regimessystems prepared by sandrea butcher 2. Flexible exchange rate is also known as floating exchange rate. The choice and design of exchange rate regimes mar gudmundsson introduction this paper discusses the design and management of exchange rate regimes in africa. Choice of exchange rate regimes for developing countries english abstract. What are the costs and benefits of various exchange rate regimes. Russian central bank abandons rouble trading band, floats rouble. The adoption of fixed exchange rates endogenously increases the desirability of this currency area by reducing the shock asymmetry. Managed floating exchange rate this is the system that most developed nations use. If, under a fixed system, a country decided to issue fiat money and provoked inflation, the rise of the domestic price level would lead to a trade deficit. Exchange rate regimes, monetary policy and inflation targeting. An empirical study of exchange rate regimes based on data compiled from 150 member countries of the international monetary fund over the past thirty years. Jun 16, 2016 pdf exchange rate regimes and the stability of the international monetary system read full. It is important to understand terms such as foreign exchange and exchange rate as they are central to understanding the economy around you. A simple model of exchange rate regime choice is developed, and.
This consists of i managed float and ii free float. As international currency markets have grown rapidly in size and volume, increasing reserve holdings has become a significant burden to many nations. Ghosh is the historian of the international monetary fund. Currently, most governments use one of three different exchange rate systems. Pdf exchange rate determination and optimal economic. Exchange rate regime choice has evolved considerably in the past 100 years. Choice of exchange rate regimes for developing countries april 2001 africa region working paper series no.
The exchange rate regimes forex education forextraders. Exchange rate movements and economic performance in republic of macedonia. Each country is free to adopt the exchange rate regime that it considers optimal, and will do so using mostly monetary and sometimes even fiscal policies the distinction amongst these exchange rates. This paper analyses the choice of exchange regimes of 17 economies in. Floating exchange rates and fiat money are only for profligate countries. From a theoretical point of view the two regimes differ to the extent that the credibility of the exchange rate parity differs. Since the breakdown of the bretton woods system in the early 1970s, countries have adopted a wide variety of regimes, ranging from pure. After a brief discussion of the evaluation of chinas exchange rate regimes over the last two decades, we analyze choices of exchange rate regimes for china. Under this system, a government typically announces a range of exchange rates in which it will allow the currency to trade. This paper analyses the choice of exchange regimes of 17 economies in the mena region for the period 19902000.
The research on exchange rate regimes itself is another common topic in highlevel articles and journals. For example, denmark has fixed its exchange rate against the euro, keeping it very close to 7. It focuses on three major types of exchange rate regimes. Few topics in international economics are as controversial as the choice of an exchange rate regime. It is 1 foreign exchange rate1 1 contributors to this series are. Pdf exchange rate determination and optimal economic policy. While a vast theoretical literature explores the choice and. This reports evaluates the benefits and drawbacks of different types of exchange rate regimes from the perspective of their effects on macroeconomic stability. Annemarie gulde is assistant director of the policy wing of the african department at the international monetary fund. Crawling pegs a third exchange rate regime is the crawling pega hybrid between fixed and flexible exchange rates. There is only a tiny variation around the fixed exchange rate against another currency, well within plus or minus 2%. In this system, the currency is allowed to float against all other currencies thereby letting market forces determine the value of the currency. Since the breakdown of the bretton woods system in the early 1970s, countries have adopted a wide variety of. How do alternative exchange rate regimes operate and how.
183 1001 274 665 18 1085 288 219 885 683 731 1552 860 1176 1542 858 122 683 854 728 984 1226 1175 439 1269 1444 1070 840 1003 143 762 1061 1021 1062 954 1316 713 1304 1349 1034 83 302 1358 857 621