Exchange Rate Regime

An exchange rate regime is a set of rules and regulations that govern the value of a currency in relation to other currencies. Exchange rate regimes are used by governments to manage their currency’s value and to influence the level of economic activity in their country. Exchange rate regimes can be either fixed or floating. In a fixed exchange rate regime, the value of a currency is fixed against another currency or a basket of currencies. In a floating exchange rate regime, the value of a currency is determined by the market forces of supply and demand.

History of Exchange Rate Regimes

The history of exchange rate regimes dates back to the Bretton Woods Agreement of 1944. This agreement established a system of fixed exchange rates between the major currencies of the world. Under this system, the value of a currency was fixed against the US dollar, and the US dollar was in turn fixed against gold. This system of fixed exchange rates lasted until the early 1970s, when it was replaced by a system of floating exchange rates.

Since then, countries have adopted a variety of exchange rate regimes. Some countries have adopted a fixed exchange rate regime, while others have adopted a floating exchange rate regime. Some countries have adopted a managed float exchange rate regime, where the central bank intervenes in the foreign exchange market to influence the value of the currency. Other countries have adopted a free float exchange rate regime, where the value of the currency is determined solely by the forces of supply and demand.

Comparison of Exchange Rate Regimes

Summary

An exchange rate regime is a set of rules and regulations that govern the value of a currency in relation to other currencies. Exchange rate regimes are used by governments to manage their currency’s value and to influence the level of economic activity in their country. Exchange rate regimes can be either fixed or floating, and countries have adopted a variety of exchange rate regimes, including fixed, floating, managed float, and free float exchange rate regimes.

For more information about exchange rate regimes, visit the websites of the International Monetary Fund, the World Bank, and the Bank for International Settlements.

See Also

• Currency Exchange
• Foreign Exchange Market
• Exchange Rate Risk
• Currency Appreciation
• Currency Depreciation
• Balance of Payments
• Interest Rate Parity
• Currency Swap
• Currency Intervention
• Currency Peg

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