Exchange Rate Regime And Exchange Rate Flexibility
Synopsis
The flexible exchange rate system is where the exchange rate is decided and maintained on platforms that dictate the permanent fixed ration or the completely flexible ratio.
However this has different implication for the extent in which the relevant authorities are willing to participate in based on the foreign exchange market stability. The degree of flexibility dictates the category in which the transaction bodies determine which would include currency unions, dollarized regimens and currency boards.
The conventional currency pegs are also designed to be under fixed rates. The managed and independent “floats” are considered flexible regimens and are exposed to time inconsistency problems and exchange rates that are rather volatile even at best in different degrees.
The Rates
The exchange rate regime is basically how a country manages their currency issues in connection to that of other currencies and the foreign exchange market. The monetary policy designed and adopted is generally dependant on the factors that are also dictated to by the monetary policy in place. Actively playing a part in keeping the rates fairly stable by having a pegged float, the central bank is able to keep the rates from deviating too much, either high or low.
Over time some countries have opted to shift away from the fixed rate regime and move towards a more flexible rate which is mainly based on the supply and demand of the said currency. However too much volatility in the global markets can cause challenges for countries adopting this over time, as shown in the globalization platform that can amplify the costs of incorporating inappropriate policies which results in trading looses.
Most governing bodies are not trying to determine which policy works best and is to their advantage in relation to the global sentiments. Many are considering the decision to make the transition from fixed to floating currencies.