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Classification of Exchange RateRegimes: Floating Rate Regimes
F
loating Currency Regime:
No (or at best occasional) government involvement(i.e., intervention) in foreign exchange markets. Market forces, i.e., demand and supply, are theprimary determinate of foreign exchange rates(prices). Financial institutions (global banks, investment firms),multinational firms, speculators (hedge funds),exporters, importers, etc. Central banks may intervene occasionally to offset whatthey regard as “inappropriate” or “disorderly” exchangerate levels.
Classification of Exchange RateRegimes: Managed Rate Regimes
Managed Currency (“Dirty Float”) Regime:
High degree of intervention of government in foreignexchange market (perhaps on a daily basis). Purpose: to offset moderate market forces and produce an“desirable” exchange rate level or path. Usually done because exchange rate is seen asimportant to the national economy (e.g., export sectoror the price of critical imports or as a means to controlinflation). Currency’s exchange rate will be managed in relationto another currency (or a market basket of currencies) Preferred currencies are the US dollar and Euro.
Examples of Currencies by Regime
Floating Rate Currencies : Canadian dollar (1970), U.S. dollar (1973), Japanese yen (1973), British pound (1973), Australian dollar (1985), New Zealand dollar (1985), SouthKorean Won (1997), Thailand baht (1997), Euro (1999), Brazilian real(1999), Chile peso (1999), Argentina Peso (2002). Managed (Floating) Rate Currencies: Singapore dollar, 1981, Costa Rica colon (U.S. dollar), Malaysia ringgit(2005, Market Basket), Vietnam dong (11/08 U.S. dollar). Pegged Rate Currencies – to a fixed rate (against the U.S. dollaror market basket): Hong Kong dollar, since 1983 (7.8KGD = 1USD), Saudi Arabia riyal(3.75SAR = 1USD), Oman rial (0.385OMR = 1USD) Pegged Rate Currencies (Crawling Peg) – to a trend (againstthe U.S. dollar or market basket): China yuan (7/05 Market Basket), Bolivia boliviano (U.S. dollar) Note: The IMF notes that 66 out of 192 countries they classify usethe U.S. dollar as a “anchor.” Data above as of 2009.
Changing Exchange Rate Regimes:1970 -2010 (IMF Classifications) % by Number of Countries
% by GDP of Countries
Simplified Model: Strengthening FX
Any situation that increases the demand (d to d’) for agiven currency will exert upward pressure on thatcurrency’s exchange rate (price). Any situation that decreases the supply (s to s’) of agiven currency will exert upward pressure on thatcurrency’s exchange rate (price).
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Simplified Model: Weakening FX
Any situation that decreases the demand (d to d’) for agiven currency will exert downward pressure on thatcurrency’s exchange rate (price). Any situation that increases the supply (s to s’) of agiven currency will exert downward pressure on thatcurrency’s exchange rate (price).
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