(a) A country’s exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the for ex market. This is in contrast to a “fixed exchange rate” regime.
(b) Fixed Exchange Rate’ A country’s exchange rate regime under which the government or central bank ties the official exchange rate to another country’s currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a country’s currency value within a very narrow band. Also known as pegged exchange rate.
In a fixed exchange rate system, a country’s central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. The central bank provides the assets and/or the foreign currency or currencies which are needed in order to finance any payments imbalances.
(c) Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries exchange by buying and selling currencies. It is also known as a dirty float.
Managed float exchange rates are determined in the foreign exchange market. Authorities can and do intervene, but are not bound by any intervention rule.
Often accompanied by a separate nominal anchor, such as inflation target. The arrangement provides a way to mix market-determined rates with stabilizing intervention in a non-rule-based system. Its potential drawbacks are that it doesn’t place hard constraints on monetary and fiscal policy. It suffers from uncertainty from reduced credibility, relying on the credibility of monetary authorities. It typically offers limited transparency.
