Foriegn Exchange Regime

Saturday, September 12, 2009

Foreign Exchange rates are of critical importance for millions of people. They affect the costs of our foreign vacations and our imported cars. They affect the number of dollars that we end up getting for the oranges and beef that we sell to Japan. Because of its importance, governments pay a great deal of attention to what is happening in foreign exchange markets and, more than that, take actions designed to achieve what they regard as desirable movement in exchange rates. There are ways in which the government can operate the foreign exchange market----three regimes


1. Fixed Exchange Rate
2. Flexible Exchange Rate
3. Managed Exchange Rate

A Fixed Exchange Rate is an exchange rate the value of which is pegged by the country’s central Bank. For example , the Pakistan government can adopt a fixed exchange rate by defining the Pak Rupee to be worth a certain number of units of some other currency and with the Fed taking actions designed to maintain that announced value.

A Flexible Exchange Rate is an exchange rate the value of which is determined by market forces in absence of central bank intervention.

A Managed Exchange Rate is an exchange rate the value of which is influenced by the central bank’s intervention in foreign exchange market. Under a managed exchange rate regime, the central bank’s intervention does not seek to keep the exchange rate fixed at a pre – announced level.