Exchange rate regimes

Learning Path MacroeconomicsExchange rates can be understood as the price of one currency in terms of another currency. However, just like for goods and services, we must take into account what determines that price, since governments can influence it, and even fix it. Exchange rate regimes (or systems) are the frame under which that price is determined. From a purely floating exchange rate, to a central bank determined fixed exchange rate, this Learning Path explains the basics of each of these regimes.

We’ll start by learning about the concept itself, and will continue with each regime type, starting with the ones with highest monetary policy independence, and moving to less independent regimes.
Definition:

Exchange rate regimes, a simple definition and a list of types.

High independence:

Flexible exchange rate, with two different subtypes:

Free (clean) float, where market forces determine the price;

Managed (dirty) float, when some governmental intervention happens.

Decreasing independence:

From higher to lower monetary policy independence, we have:

Crawling pegTarget zone arrangementFixed exchange rate, and Currency board.

Low independence:

No separate legal tender, such as dollarization.

Monetary union, such as the Euro zone.

 

We’ll start by learning about the definition of exchange rate regimes.