Flexible Exchange Rate
A flexible exchange rate is a type of exchange rate regime in which a currency’s value is allowed to fluctuate according to the foreign exchange market. Under this system, the external value of a currency is determined by supply and demand in the foreign exchange market, and is free from government intervention. This type of exchange rate system is also known as a floating exchange rate or a market-determined exchange rate.
History of Flexible Exchange Rate
The flexible exchange rate system was first introduced in the early 1970s, when the Bretton Woods system of fixed exchange rates was abandoned. The Bretton Woods system had been in place since the end of World War II, and had been successful in maintaining relative stability in the international monetary system. However, the system was eventually abandoned due to the increasing instability of the fixed exchange rates.
Since the abandonment of the Bretton Woods system, the flexible exchange rate system has become the dominant exchange rate regime in the world. This system has been successful in providing greater flexibility and stability in the international monetary system, and has allowed countries to pursue independent monetary policies.
Comparison of Exchange Rate Systems
| Exchange Rate System | Value of Currency | Government Intervention |
|---|---|---|
| Fixed Exchange Rate | Fixed | Yes |
| Flexible Exchange Rate | Floating | No |
Summary
A flexible exchange rate is a type of exchange rate regime in which a currency’s value is allowed to fluctuate according to the foreign exchange market. This type of exchange rate system is also known as a floating exchange rate or a market-determined exchange rate. The flexible exchange rate system was first introduced in the early 1970s, when the Bretton Woods system of fixed exchange rates was abandoned. Since then, the flexible exchange rate system has become the dominant exchange rate regime in the world. For more information about flexible exchange rates, please visit the websites of the International Monetary Fund, the World Bank, and the Bank for International Settlements.
See Also
- Fixed Exchange Rate
- Currency Exchange Rate
- Exchange Rate Regime
- Foreign Exchange Market
- Bretton Woods System
- International Monetary Fund
- World Bank
- Bank for International Settlements
- Currency Appreciation
- Currency Depreciation
