Over the last six decades since independence the exchange rate system in india has transited from fixed exchange rate regime where the indian rupee was pegged to the uk pound to a basket of currencies during the 1970s and 1980s and eventually to the present form of market determined exchange rate regime since 1993. Imf members choose fixed exchange rate regimes, and 15 have intermediate arrangements imf, 2002. Pdf this note describes different exchange rate regimes that are currently used in. A specie standard is essentially a fixed exchange rate regime. The majority of countries in africa are currently classified by the imf. Exchange rates are the amount of one currency you can exchange for another. List of countries by exchange rate regime wikipedia. However, these are, in all but a few cases, far removed from.
Fixed exchange rate system refers to a system in which exchange rate for a currency is fixed by the government. In this regime a country does not have its own legal tender. Alesina and wagner choosing and reneging on exchange rate regimes 773 combining these various points, alesina and barro 2002 have examined the questionofoptimalcurrencyareas,trade,precommittment,andstabilizationpolicies in an integrated real and monetary model of endogenous formation of areas of common currency. When a country has its own currency as legal tender, it can choose between the three broad types of exchange rate systems. Egypts exchange rate regime policy after the float. You would get a little less than the exchange rate as the banks charge their service fee. All classifications are collapsed to three categories. It is important to understand terms such as foreign exchange and exchange rate as they are central to understanding the economy around you. Exchange rate policy and financial system management by brian kingston. An exchange rate regime is how a nation manages its currency in the foreign exchange market. Exchange rate regimes exchange rate regime refers to the way the value of the domestic currency in term of foreign currencies is determined.
The type of exchange rate regime used varies widely among countries and over time. There are three broad exchange rate systemscurrency board, fixed exchange rate and floating rate exchange rate. It is a type of fixed regime that has special legal and procedural rules designed to make the peg harderthat is, more durable. The choice of exchange rate regimes in the mena countries. Section 5, considers the foreign exchange market, while section 6, discusses foreign. Exchange rates can be understood as the price of one currency in terms of another currency. The country uses another countrys currency as its domestic currency.
One of the most important issues left unanswered in international finance is the debates over which type of exchange rate can best stimulate economic growth. However, just like for goods and services, we must take into account what determines that price, since governments can influence it, and even fix it. However, independently floating exchange rates comparable to those of major international currencies remain rare in the developing world. In this article we will discuss about the advantages and disadvantages of floating exchange rates. An exchange rate regime is closely related to that countrys monetary policy. Find, read and cite all the research you need on researchgate. There are two main types of exchange rates in nigeria. Impact of exchange rate regimes on economic growth abstract it has been a challenge to identify a direct correlation between exchange rate regimes and economic growth. Still, most of europe now operates as the ultimate fixed exchange rate regime, a region with a single currency. The evolution and impact of asian exchange rate regimes. These authors point out that 87% of developing countries had some type of pegged exchange rate in 1975, but that this proportion fell to well below 50% in. Floating exchange rates have the following advantages. Thus, an exchange rate has two components, the domestic currency and a foreign currency, and can.
While most of the advanced countries have long ago chosen floating regime or monetary union, the developing countries tend to experiment with different exchange rate arrangements. The benefit is the elimination of exchange rate fluctuations. How do alternative exchange rate regimes operate and how can. Structural adjustment programme in 1986, nigeria has adopted different types of exchange rate regimes, ranging from floating exchange rate regimes to fixedpegged regimes. The objective of this note is to describe different types of exchange rate regimes and the. Exchange rate misalignment under different exchange. Annual report on exchange arrangements and exchange restrictions 2014. Such an exchange rate mechanism ensures the stability of the exchange rates by linking it to a stable currency itself. By utilizing two different exchange rate classifications imf and. First, i will explain the different types of exchange rate regimes in the world. What are the costs and benefits of various exchange rate regimes.
Describe the exchange rate regimes cfa level 1 analystprep. Devaluation refers to reduction in price of domestic currency in terms of all foreign currencies under fixed exchange rate regime. To participate in this radical experiment, the nations switching to the euro had to agree to give up considerable autonomy in monetary and fiscal policy. At the other end of the spectrum are floating exchange rate regimes. The choice and design of exchange rate regimes bis. The impact of exchange rate regimes on economic growth in nigeria. The key questions are how frequently and by how much the peg is adjusted and what. Within the fixed exchange rate, a country can choose a rigid peg or a crawling peg. Almost every exchange rate regime has its flaws, virtues, and particularities. For example, the dollars exchange rate tells you how much a dollar is worth in a foreign currency.
This consists of i managed float and ii free float. Different exchange rate systems with pros and cons. This rate depends on the local demand for foreign currencies and their local supply, countrys trade balance, the strength of its economy, and other such factors. It is a type of fixed regime that has special legal and procedural rules. Types of exchange rate systems financial management. This study attempts to uncover possible systematic relationships between the choice of an exchange rate regime by the mena countries and some traditional determinants proposed in the existing literature. Types of exchange rate regimes systems prepared by sandrea butcher 2. The incidence of currency crises, identified as episodes of severe exchange market pressures, during the period 19902001 is explored across imf members to identify the regimes under. Exchange rate regimes or systems are the frame under which that price is determined. Foreign exchange rate determination in india and types of. Russian central bank abandons rouble trading band, floats rouble. Fixed exchange rate mechanisms under a fixed exchange rate, national supply and demand for currency may vary, but the nominal exchange rate does not monetary authorities ensure that the rate does not change typically, there are bands set abovebelow the par value that allow for some small fluctuation in the exchange rate. The fixed exchange rate has three variants and the floating exchange rate has two variants. A fixed exchange rate is a type of exchange rate regime where a currencys value is fixed.
Pdf zambia exchange rate analysis, foreign exchange rate. Main types of foreign exchange rates your article library. A crosscountry time series analysis of exchange rate regimes isamu kato and merih uctum march 2003 the graduate school and university center, the city university of new york brooklyn college, the graduate school and. A fixed exchange rate, also known as the pegged exchange rate, is pegged or linked to another currency or asset often gold to derive its value. Currency board is an exchange rate regime in which a countrys exchange rate maintain a fixed exchange rate with a foreign currency, based on an explicit legislative commitment. Since exchange rates in different currencies fluctuate to the influence of market forces, some nations peg their currencies to other currencies whereas others have marketdetermined floating rate regimes. An exchange rate is the price of a nations currency in terms of another currency.
Such an exchange rate mechanism ensures the stability of the exchange rates by linking it. Are pegged and intermediate exchange rate regimes more. Pdf the impact of exchange rate regimes on economic. You would get a little less than the exchange rate as the banks charge their. In finance, an exchange rate also known as a foreign exchange rate, forex rate, fx rate or agio. However, maintaining a realistic exchange rate for the naira in nigeria is very crucial, given the structure of the economy. Exchange rate regime an overview sciencedirect topics.
The bretton woods system was established in 1944 and lasted for around two decades. This question can be addressed in the context of the optimum currency area oca theory, which provides criteria for different types of countries to choose between floating and fixed exchange rate regimes. If all goods were freely tradable, and foreign and domestic residents. Although this system worked relatively well while the u. It is closely related to monetary policy and the two are generally dependent on many of the same. An exchange rate regime is the way a monetary authority of a country or currency union manages the currency in relation to other currencies and the foreign exchange market. For example, if you traveled to the united kingdom on january 29, 2019, you would only receive 0. Flexible exchange rate system refers to a system in which exchange rate is determined by forces of demand and supply of different currencies in the foreign exchange. Omotosho2 this study examines the dynamics of naira real exchange rate rer during the period 2000q1 2016q1 as well as the extent to which it deviated from its long run equilibrium path.
Several countries in africa operate pegged exchange rate regimes of the more traditional type. A fourth can be added when a country does not have its own currency and merely adopts another countrys currency. Economic and financial crises in emerging market economies. This is a list of countries by their exchange rate regime. A common feature related to the exchange rate regime and foreign exchange policy among east asian countries is that they tend to maintain a trade surplus, have a high foreign reserve in us dollars, and keep their currencies exchange value low in order to support their export sector. Many countries declare that they follow a particular exchange rate system, but may follow another system in practice. It also provides an overview of the foreign exchange market and the role of the central bank in maintaining exchange rate. With the outbreak of the two world wars in 1914 and 1939, stable exchange rate regimes had gone completely haywire. Exchange rate misalignment under different exchange rate regimes in nigeria1 sunday n. What is exchange rate regime the way an authority manages its currency in relation to other currencies and the foreign exchange market an exchange rate change is simply the price of one currency in terms of another. For example, if a country suffers from a deficit in the balance of payments.