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CONTENTS
ABSTRACT OF THE PROJECT 2

INTRODUCTION 3

FOREIGN EXCHANGE MARKET 4

EXCHANGE RATE 6

EXCHANGE-RATE REGIME 9

FLEXIBLE EXCHANGE RATE 13

TYPES OF FLOATING EXCHANGE RATE SYSTEM 15

FLOATING EXCHANGE RATE IN ECONOMICS OF THE FOREIGN

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EXCHANGE MARKET

FLEXIBLE EXCHANGE RATE REGIMES 17

DISTINGUISH BETWEEN FLEXIBLE & FIXED EXCHANGE RATES 20

ECONOMIC RATIONALE 21

FLOATING EXCHANGE RATE POLICY AND MODELLING IN INDIA 22

ADVANTAGES & DISADVANTAGES OF FLEXIBLE EXCHANGE RATES 23

THE BALANCE OF PAYMENTS AND EXCHANGE RATES 28

ARGUMENTS AGAINST FLOATING EXCHANGE RATES 30

SHIFTING TRENDS 31

WHAT IS THE FUTURE HOLDS? 32

INDIAN EXCHANGE RATE REGIME 33

CONCLUSIONS 35

BIBLIOGRAPHY 38

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 ABSTRACT

This Project studies the impact of global financial on

the exchange rate policies(float rate) in emerging

countries. Many emerging countries have loosened

the link of their currencies to the US dollar Spillovers

from advanced financial markets to currencies in emerging countries stem from the same causes

documented in the literature on contagion, such as the drying–up of investors’ liquidity, the rise in risk

aversion, and the updating of their risk assessments.

Consequently, interdependencies across currencies are likely to be exacerbated during crisis periods. To

test this hypothesis, we assess the exchange rate policies by their degree of flexibility, itself proxied by

the exchange rate volatility, and investigate their relationship to a global financial stress indicator,

measured by the volatility on global markets. The results confirm that exchange rate flexibility does

increase more than proportionally with the global financial stress, for most countries in the sample.

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 INTRODUCTION
The exchange rate is a key financial variable that affects decisions made by foreign exchange investors,
exporters, importers, bankers, businesses, financial institutions, policymakers and tourists in the developed as
well as developing world. Exchange rate fluctuations affect the value of international investment portfolios,
competitiveness of exports and imports, value of international reserves, currency value of debt payments, and
the cost to tourists in terms of the value of their currency. Movements in exchange rates thus have important
implications for the economy’s business cycle, trade and capital flows and are therefore crucial for
understanding financial developments and changes in economic policy.

Every currency area must decide what type of exchange rate arrangement to maintain. Between permanently
fixed and completely flexible however, are heterogeneous approaches. They have different implications for
the extent to which national authorities participate in foreign exchange markets. According to their degree of
flexibility, post-Bretton Woods-exchange rate regimes are arranged into three categories: currency unions,
dollarized regimes, currency boards and conventional currency pegs are described as “fixed-rate regimes”;
Horizontal bands, crawling pegs and crawling bands are grouped into “intermediate regimes”; Managed and
independent floats are described as flexible regimes. All monetary regimes except for the permanently fixed
regime experience the time inconsistency problem and exchange rate volatility, albeit to different degrees.

A floating exchange rate or fluctuating exchange rate is a type of exchange-rate regime in which a currency's
value is allowed to fluctuate according to the foreign-exchange market. A currency that uses a floating
exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.

Flexible rates emerge when fixed rate systems fail. In the 1930’s the failure is centered around fears of
depreciation creating depreciation. In the 1970’s the Bretton Woods system fails in the short run due to
inflation in the US which made the dollar a poor choice for an international currency. However, flexible
rates create problems as well. If one country reduces its interest rates, then the exchange rate is likely to
overshoot its eventual decline. The short run drop in the exchange rate and medium term rise allows the
interest parity condition to be satisfied. Countries strongly linked by trade, may well try to manage interest
rates so that exchange rates do not change too much.

In the modern world, most of the world's currencies are floating; such currencies include the most widely
traded currencies: the United States dollar, the euro, the Norwegian krone, the Japanese yen, the British
pound, the Swiss franc, and the Australian dollar. However, central banks often participate in the markets to

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attempt to influence the value of floating exchange rates. The Canadian dollar most closely resembles a
"pure" floating currency, because the Canadian central bank has not interfered with its price since it officially
stopped doing so in 1998. The US dollar runs a close second, with very little change in its foreign reserves; in
contrast, Japan and the UK intervene to a greater extent.

From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971,
the US decided no longer to uphold the dollar exchange at 1/35th of an ounce of gold, so that the currency
was no longer fixed. After the 1973 Smithsonian Agreement, most of the world's currencies followed suit.
However, some countries, such as most of the Gulf States, fixed their currency to the value of another
currency, which has been more recently associated with slower rates of growth. When a currency floats,
targets other than the exchange rate itself are used to administer monetary policy (see open-market
operations).

The Bretton Woods system of monetary management established the rules for commercial and financial
relations among the world's major industrial states in the mid-20th century. The Bretton Woods system was
the first example of a fully negotiated monetary order intended to govern monetary relations among
independent nation-states.

FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading
of currencies. The main participants in this market are the larger international banks. Financial centers around
the world function as anchors of trading between a wide range of different types of buyers and sellers around
the clock, with the exception of weekends. Electronic Broking Services (EBS) and Reuters 3000 Xtra are two
main interbank FX trading platforms. The foreign exchange market determines the relative values of different
currencies.

The foreign exchange market is the market in which foreign currency—such as the yen or euro or pound—is
traded for domestic currency for example, the U.S. dollar. This “market” is not in a centralized location;
instead, it is a decentralized network that is nevertheless highly integrated via modern information and
telecommunications technology.

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The foreign exchange market works through financial institutions, and it operates on several levels. Behind
the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in
large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-
scenes market is sometimes called the “interbank market”, although a few insurance companies and other
kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving
hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has
little supervisory entity regulating its actions.

In the spot market, parties contract for delivery of the foreign exchange immediately. In the forward market,
they contract for delivery at some point, such as three months, in the future. In the option market, they enter a
contract that allows one party to buy or sell foreign exchange in the future, but does not require it (thus the
word “option”). Most of the trading is among banks, either on behalf of customers or on their own account.
The counterparty to the transaction could be another dealer, another financial institution, or a nonfinancial
customer. The survey reported that 89 percent of the trading involved the dollar on one side of the transaction
or the other.

The foreign exchange market assists international trade and investment by enabling currency conversion. For
example, it permits a business in the United States to import goods from the European Union member states,
especially Eurozone members, and pay euros, even though its income is in United States dollars. It also
supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest
rate differential between two currencies. A typical foreign exchange transaction, a party purchases some
quantity of one currency by paying some quantity of another currency. The modern foreign exchange market
began forming during the 1970s after three decades of government restrictions on foreign exchange
transactions (the Bretton Woods system of monetary management established the rules for commercial and
financial relations among the world's major industrial states after World War II), when countries gradually
switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the
Bretton Woods system.

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 THE FOREIGN EXCHANGE MARKET IS UNIQUE BECAUSE OF THE FOLLOWING
CHARACTERISTICS

 Its huge trading volume representing the largest asset class in the world leading to high liquidity;
 its geographical dispersion;
 its continuous operation: 24 hours a day except weekends
 the variety of factors that affect exchange rates;
 the low margins of relative profit compared with other markets of fixed income; and
 the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding
currency intervention by central banks.

EXCHANGE RATE

The exchange rate is a key financial variable that affects decisions made by foreign exchange investors,
exporters, importers, bankers, businesses, financial institutions, policymakers and tourists in the developed as
well as developing world. Exchange rate fluctuations affect the value of international investment portfolios,
competitiveness of exports and imports, value of international reserves, currency value of debt payments, and
the cost to tourists in terms of the value of their currency. Movements in exchange rates thus have important
implications for the economy’s business cycle, trade and capital flows and are therefore crucial for
understanding financial developments and changes in economic policy.

The exchange rate is a key financial variable that affects decisions made by foreign exchange investors,
exporters, importers, bankers, businesses, financial institutions, policymakers and tourists in the developed as
well as developing world. Exchange rate fluctuations affect the value of international investment portfolios,
competitiveness of exports and imports, value of international reserves, currency value of debt payments, and
the cost to tourists in terms of the value of their currency. Movements in exchange rates thus have important
implications for the economy’s business cycle, trade and capital flows and are therefore crucial for
understanding financial developments and changes in economic policy. Timely forecasts of exchange rates
can therefore provide valuable information to decision makers and participants in the spheres of international
finance, trade and policy making.

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With liberalization and development of foreign exchange and assets markets, variables such as capital flows,
volatility in capital flows and forward premium have also became important in determining exchange rates.
Furthermore, with the growing development of foreign exchange markets and a rise in the trading volume in
these markets, the micro level dynamics in foreign exchange markets have increasingly became important in
determining exchange rates. Agents in the foreign exchange market have access to private information about
fundamentals or liquidity, which is reflected in the buying/selling transactions they undertake, that are termed
as order flows.

What is Exchange Rate?

Rate at which one currency may be converted into another. The exchange rate is used when simply
converting one currency to another (such as for the purposes of travel to another country), or for
engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors
which influence the exchange rate, such as interest rates, inflation, and the state of politics and the
economy in each country. Also called rate of exchange or foreign exchange rate or currency exchange
rate.

In the foreign exchange market, at a particular time, there exists, not one unique exchange rate, but a variety
of rates, depending upon the credit instruments used in the transfer function. Major types of exchange rates
are as follows:

 Spot Rate: Spot rate of exchange is the rate at which foreign exchange is made available on the spot.
It is also known as cable rate or telegraphic transfer rate because at this rate cable or telegraphic sale
and purchase of foreign exchange can be arranged immediately. Spot rate is the day-to-day rate of
exchange.
The spot rate is quoted differently for buyers and sellers. For example, $ 1 = Rs 15.50 for buyers and
$ 1 = Rs 15.30 for the seller. This difference is due to the transport charges, insurance charges,
dealer's commission, etc. These costs are to be borne by the buyers.

 Forward Rate: Forward rate of exchange is the rate at which the future contract for foreign currency
is made. The forward exchange rate is settled now but the actual sale and purchase of foreign
exchange occurs in future. The forward rate is quoted at a premium or discount over the spot rate.

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 Long Rate: Long rate of exchange is the rate at which a bank purchases or sells foreign currency bills
which are payable at a fixed future date. The basis of the long rate of exchange is the interest on the
delayed payment.

The long rate of exchange is calculated by adding premium to the spot rate of exchange in the case of
credit purchase of foreign exchange and deducting premium from the spot rate in the case of credit
sale.

If the spot rate is £1 = $ 2.80 and the rate of interest is 6%, then on 30 days bill, $ 0.014 will be added
per pound in case of credit purchase and deducted in case of credit sale of dollars.

 Fixed Rate: Fixed or pegged exchange rate refers to the system in which the rate of exchange of a
currency is fixed or pegged in terms of gold or another currency.

 Flexible Rate: Flexible or floating exchange rate refers to the system in which the rate of exchange is
determined by the forces of demand and supply in the foreign exchange market. It is free to fluctuate
according to the changes in the demand and supply of foreign currency.

 Multiple Rates: Multiple rates refer to a system in which a country adopts more than one rate of
exchange for its currency. Different exchange rates are fixed for importers, exporters, and for
different countries.

 Two-Tier Rate System: Two-tier exchange rate system is a form of multiple exchange rate system in
which a country maintains two rates, a higher rate for commercial transactions and a lower rate for
capital transactions.

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The exchange rate is the price of foreign currency. For example, the exchange rate between the British
pound and the U.S. dollar is usually stated in dollars per pound sterling ($/£); an increase in this
exchange rate from, say, $1.80 to say, $1.83, is a depreciation of the dollar. The exchange rate between
the Japanese yen and the U.S. dollar is usually stated in yen per dollar (¥/$); an increase in this exchange
rate from, say, ¥108 to ¥110 is an appreciation of the dollar. Some countries “float” their exchange rate,
which means that the central bank (the country’s monetary authority) does not buy or sell foreign
exchange, and the price is instead determined in the private marketplace. Like other market prices, the
exchange rate is determined by supply and demands in this case, supplies of and demand for foreign
exchange.

EXCHANGE-RATE REGIME

A few points merit emphasis in any debate about exchange rate regime choices.

• In a pure fixed exchange rate regime, economic activity adjusts to the exchange rate. In a purely
floating regime, the exchange rate is a reflection of economic activity. In either case, the economy’s

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“fundamentals” are the chief determinant of whether economic stability and prosperity are achieved, not
the exchange regime per se.

• There is probably no universally “optimal” regime. Regime choices should reflect the individual
properties and characteristics of an economy.

Both “fixed” and “flexible” regimes have strengths and weaknesses. A fixed exchange rate is generally
seen as being transparent and a simple anchor for monetary policy. Countries with weak institutions can
“import” monetary credibility by anchoring to a currency with a credible central bank. A conventional
view is that a fixed exchange rate has the advantage of reducing transaction costs and exchange rate risk.
In countries with less developed financial sectors, economic agents may not have the financial tools to
hedge long-term currency risks.

But adjustments under fixed exchange rates can be very gradual and require significant flexibility in
prices in the domestic economy, especially in the face of changing capital flows. The inflexibility of fixed
exchange rates can place an enormous constraint on monetary policy and create pressures in a downturn
for pro-cyclical fiscal policies. Fixed exchange rate regimes in economies where interest rates are higher
than rates denominated in the anchor currency can also give debtors an incentive to borrow unhedged in
the anchor currency, leaving national balance sheets vulnerable to exchange rate changes. To withstand
currency pressures under fixed exchange rate regimes, authorities have an incentive to put in place
harmful capital controls (to be sure, such pressures can exist under flexible regimes as well).

A country cannot maintain a fixed exchange rate, open capital market, and monetary policy independence
at the same time. In recent years more large emerging market countries, increasingly integrated into the
global financial system, have begun to adopt policies that target low inflation and establish central bank
independence. Flexible exchange rates have the advantage that they allow a country to pursue an
independent monetary policy, rather than have its own monetary policy set by an anchor currency
country. Experience shows that flexible exchange rates are more resilient in the face of shocks, and are

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better able to distribute the burden of adjustment between the external sector and the domestic economy.
Also, fixed exchange rates have the effect of sharply reducing or eliminating exchange rate volatility.
Protection from volatility dampens the incentives for financial markets to develop hedging products and
financial instruments, so risk is more likely to be transferred to the public sector effectively.

Against this background, exchange regime choices will vary.

Major Currencies

It is broadly agreed that the major currencies – the dollar, the euro and the yen – should, and do, float
against one another. The economies represented by these currencies account for 42% of global economic
activity. Nearly all global trade and capital flow transactions are denominated in one of these three
currencies, as are nearly 95% of official foreign exchange reserves. Other large economies with well
developed financial sectors, such the U.K., Canada, or Australia should, and do, float as well.

Emerging Market Economies

Larger emerging market economies should adopt more flexible exchange rate regimes. “Larger” is meant
to apply to economies such as, though not exclusively, Mexico, Brazil, South Korea, and China. This is
all the more true as these economies become integrated into the global financial system and have
increasingly developed financial sectors. Where flexible exchange rates are in operation, economies have
proven to be more robust and resilient. Brazil demonstrated this quite well in 2002 when the markets put
substantial downward pressure on the Real ahead of the Presidential elections. In the case of downward
currency pressure, greater flexibility limits the one-way betting that results in rapid depletion of reserves
and allows the external sector to bear a portion of the needed adjustment, rather than imposing an undue
burden on domestic demand.

Flexible regimes for “larger” economies cannot solve all problems. In particular, there is no substitute for
sound fiscal and monetary policies and resilient institutions. Economies with a flexible exchange rate
need an alternative anchor for monetary policy, such as central bank independence and inflation targeting,
and they should take steps to put in place a sound system of bank regulation.

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Lower-Income Economies

Lower-income economies with less developed monetary and financial sectors, and less credible
institutions, on the other hand, can face special problems. For some of these economies, a very hard peg
to a major currency can improve monetary stability and improve the efficiency of commercial
transactions. Typically, these economies, where credibility in existing institutions is not yet strong, still
have underdeveloped financial sectors and supervisory systems, suffer from higher rates of inflation, and
are in need of anchors for monetary policy.

The IMF and Exchange Rates

The IMF’s Articles of Agreement allow members to adopt the exchange rate regime of their choice.

However, the IMF – taken to mean both management and shareholders – has a responsibility rigorously

and candidly to assess the consistency of that regime with both country circumstances and the

international system. The Fund is not only a trusted advisor to each of its members but the protector of

the system as a whole. The IMF Articles of Agreement recognize the danger of not permitting balance of

payments adjustments to take place, and this danger motivated the IMF to establish procedures for

surveillance of exchange rate policies. The implementation of these procedures needs to be significantly

improved. In general terms, the international financial system would benefit from a multilateral approach

to greater exchange rate flexibility. It is in the collective interest of all 4economies for the IMF – the

world’s central institution for global monetary cooperation to assume this responsibility.

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 FLEXIBLE EXCHANGE RATE
Definition
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 forex market. This is in contrast to a "fixed exchange
rate" regime.

The exchange rate in which the value of the currency is determined by the free market. That is, a

currency has a floating exchange rate when its value changes constantly depending on the supply and

demand for that currency, as well as the amount of the currency held in foreign reserves. An advantage to

a floating exchange rate is that it tends to be more economically efficient. However, floating exchange

rates tend to be more volatile depending on the particular currency. A currency with a floating exchange

rate may undergo currency appreciation or currency depreciation, depending on market fluctuations. A

floating exchange rate is also called a flexible exchange rate.

In a floating exchange rate system the value of the currency is affected by everyday markets for supply

and demand. Therefore trade and capital flows play a big role in determining the currency’s value.

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There are two different types of floating exchange rate systems. Dirty Float and Clean Float and this

depends on whether or not there is government intervention.

The exchange rate can be stabilized through both monetary and fiscal policy:

 Through monetary policy when there is an excess in money supply the government would

purchase domestic assets to weaken the currency and push the interest rate down.
 Fiscal expansion causes an appreciation of the currency that forces the government to purchase

foreign assets. This will increase the money supply preventing the currency appreciation.

Monetary Deficits
Floating exchange rates help countries in correcting their monetary deficits. When a country has more

outflows of currency than inflows, it is bound to face a deficit. The value of currencies of such

nations will depreciate in relation to currencies of other nations. When such a country tries to export

its goods, it is not able to command a fair price for them. When the country imports from other

countries, it has to pay more in relation. A floating rate of exchange provides an automatic adjustment

factor. The fluctuations in the exchange rates offset the country's monetary imbalances.

TYPES OF FLOATING EXCHANGE RATE SYSTEM

1. Free Float – Under this the exchange rate of a country is determined by the market and there is

no intervention either by the government or the central bank of the country. It is determined by the

interaction of the demand and supply for the currency. Under this system there is a risk of the

currency either appreciating or deprecating suddenly resulting in currency coming in to pressure

and becoming more volatile.

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 Under this mechanism, there is a high risk of volatility. One currency may appreciate or

depreciate steeply, and the exchange rate is similarly affected. This mechanism is called the "free

float" or the "clean float."

Features
 Value of the currency is determined solely by market demand for and supply of the currency in
the foreign exchange market.
 Trade flows and capital flows are the main factors affecting the exchange rate
 In the long run it is the macro economic performance of the economy (including trends in
competitiveness) that drives the value of the currency
 No pre-determined official target for the exchange rate is set by the Government. The government
and/or monetary authorities can set interest rates for domestic economic purposes rather than to
achieve a given exchange rate target
 It is rare for pure free floating exchange rates to exist - most governments at one time or another
seek to "manage" the value of their currency through changes in interest rates and other controls

2. Managed Float – In order to reduce the volatility in currency countries follow managed float,

under this system central banks of the country tend to intervene from time to time in order to

smoothen the fluctuations in the exchange rate in the currency market.

This method is a variation on the free float mechanism. All countries have trade links with one

another, and international currencies fluctuate daily. Many countries of the world use the float

system to determine the rates of exchange. Here, the government and central banks of the country

intervene and help to set the exchange rates. These authorities try to smooth out the fluctuations

and volatility of the currencies. This system is called the "managed float" or the "dirty float."

FLOATING EXCHANGE RATE IN

ECONOMICS OF THE FOREIGN EXCHANGE MARKET
In a floating exchange rate regime the price of the dollar, like any other market-determined price,
depends on the relevant forces of supply and demand. But what are the relevant forces of supply and
demand in the foreign exchange market?

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To try to answer this question, let us consider, for illustration, the factors that determine the relationship
between the Australian dollar and the Japanese yen. The Japanese require dollars to pay for their imports
of goods and services from Australia and to fund any investment they may wish to undertake in this
country. Assume that they obtain these dollars on the foreign exchange market by supplying (selling) yen
in return. So the Japanese demand for dollars (mirrored by the supply of yen) is determined by the
exports to Japan and our capital inflow from that country.

On the other side of the market, the Australian demand for yen is determined by our need to pay for
imports from Japan, and for any capital investment that we undertake there. We buy those yen by
supplying Australian dollars in return. Thus the supply of dollars (mirrored by the demand for yen) is
determined by our imports from Japan and our capital outflow to that country.

In summary, then, the demand for Australian dollars reflects the behaviour of our exports and capital
inflow, while the supply of dollars reflects the behaviour of our imports and capital outflow. In other
words, transactions on the foreign exchange market echo the international trade and financial transactions
that are summarised in the balance of payments. Within the balance of payments, the relationship
between our exports and imports of goods and services is captured by the balance of current account,
while the relationship between capital inflow and capital outflow is captured by the balance of capital
account. The activities of international currency speculators affect the exchange rate directly through
their impact on capital flows.

The distinguishing characteristic of a floating exchange rate system is that the price of a currency adjusts
automatically to whatever level is required to equate the supply of and demand for that currency, thereby
clearing the market. The logic of the relationship between our international transactions and the supply
and demand for currencies implies that this market-clearing, or 'equilibrium', price also produces
automatic equilibrium in the balance of payments. That is, the balance of current account (whether
positive, negative, or zero) must be precisely offset by the balance (negative, positive, or zero) of the
capital account. Under floating exchange rates these outcomes are achieved automatically without the

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 need for government intervention. By contrast, under fixed exchange rates balance of payments
equilibrium is not the normal condition.

These characteristics of the floating exchange rate mechanism have important implications both for the
nature of our relationship with the global environment, and for the policy options available to the
authorities in managing the economy. Let us now consider some of these.

FLEXIBLE EXCHANGE RATE REGIMES

These systems do not particularly reduce time inconsistency problems nor do they offer specific techniques

for maintaining low exchange rate volatility.

An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the

foreign exchange market. It is closely related to monetary policy and the two are generally dependent on

many of the same factors.

The basic types are a floating exchange rate, where the market dictates movements in the exchange rate; a

pegged float, where a central bank keeps the rate from deviating too far from a target band or value; and a

fixed exchange rate, which ties the currency to another currency, mostly more widespread currencies such as

the U.S. dollar or the euro or a basket of currencies.

FLEXIBLE EXCHANGE RATE REGIMES

A crawling Exchange rate Managed float Pure float

peg bands exchange rates

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 A crawling peg attempt to combine flexibility and stability using a rule-based system for gradually

altering the currency's par value, typically at a predetermined rate or as a function of inflation

differentials. A crawling peg is similar to a fixed peg, however it can be adjusted based on clearly

defined rules.Often used by (initially) high-inflation countries or developing nations who peg to low

inflation countries in attempt to avoid currency appreciation.At the margin a crawling peg provides a

target for speculative attacks. Among variants of fixed exchange rates, it imposes the least

restrictions, and may hence yield the smallest credibility benefits. The credibility effect depends on

accompanying institutional measures and record of accomplishment.

 Exchange rate bands allow markets to set rates within a specified range; endpoints are defended

through intervention. It provides a limited role for exchange rate movements to counteract external

shocks while partially anchoring expectations. This system does not eliminate exchange rate

uncertainty and thus motivates development of exchange rate risk management tools. On the margin a

band is subject to speculative attacks. It does not by itself place hard constraints on policy, and thus

provides only a limited solution to the time inconsistency problem. The credibility effect depends on

accompanying institutional measures, a record of accomplishment and whether the band is firm or

adjustable, secret or public, band width and the strength of the intervention requirement.

 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

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 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.

 In a pure float, the exchange rate is determined in the market without public sector intervention.

Adjustments to shocks can take place through exchange rate movements. It eliminates the

requirement to hold large reserves. However, this arrangement does not provide an expectations

anchor. The exchange rate regime itself does not imply any specific restriction on monetary and fiscal

policy.

DISTINGUISH BETWEEN FLEXIBLE EXCHANGE RATE & FIXED EXCHANGE RATE

Flexible Exchange Rate Fixed Exchange Rate

 Flexible Exchange- Rate System allows the  Fixed Exchange Rate is a currency system
exchange rate to be determined by supply in which governments try to keep the values
and demand. of their currencies constant against one
another

 The floating exchange rate, in its true form,  A fixed exchange rate is based upon the
allows the marketplace to set the rate. The government's view of the value of its
forces of supply and demand determine the currency as well as the monetary policy.
value of a currency.

 Under a fixed-exchange-rate system, a

 The equilibrium exchange rate reflects the
country's central bank intervenes by buying

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 supply and demand for the currency. or selling its currency to keep its foreign-
exchange rates

 Businesses and individuals can plan their

 Businesses and individuals cannot plan activities with the certainty of the value of
their activities with the certainty of the money.
value of money.

 The central bank can also adjust the official

 Determined by supply and demand. exchange rate when necessary.

 A central bank will often then be forced to

 In a floating regime, the central bank may
also intervene when it is necessary to
ensure stability and to avoid inflation.
However, it is less often that the central
bank of a floating regime will interfere.
 This is a reserved amount of foreign
 Floating exchange rate is constantly
changing.
revalue or devalue the official rate so that
the rate is in line with the unofficial one,
thereby halting the activity of the black
market.
currency held by the central bank that it can
use to release (or absorb) extra funds into
the market. This ensures an appropriate
money supply, appropriate fluctuations in
the market (inflation/deflation) and
ultimately, the exchange rate.

ECONOMIC RATIONALE
There are economists who think that in most circumstances, floating exchange rates are preferable to

fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen

the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of

payments crisis. However, they also engender unpredictability as the result of their dynamism.

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However, in certain situations, fixed exchange rates may be preferable for their greater stability and

certainty. That may not necessarily be true, considering the results of countries that attempt to keep the

prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia

countries before the Asian currency crisis.

The debate of making a choice between fixed and floating exchange rate regimes is set forth by the

Mundell–Fleming model, which argues that an economy (or the government) cannot simultaneously

maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It must

choose any two for control and leave the other to market forces.

The primary argument for a floating exchange rate is that it allows monetary policies to be useful for

other purposes. Under fixed rates, monetary policy is committed to the single goal of maintaining

exchange rate at its announced level. Yet the exchange rate is only one of the many macroeconomic

variables that monetary policy can influence. A system of floating exchange rates leaves monetary policy

makers free to pursue other goals such as stabilizing employment or prices.

In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the

currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a

managed float. A central bank might, for instance, allow a currency price to float freely between an upper

and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of

buying or selling large lots in order to provide price support or resistance or, in the case of some national

currencies, there may be legal penalties for trading outside these bounds.

FLOATING EXCHANGE RATE POLICY

AND MODELLING IN INDIA

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India has been operating on a managed floating exchange rate regime from March 1993, marking the start
of an era of a market determined exchange rate regime of the rupee with provision for timely intervention
by the central bank1 . India’s exchange rate policy has evolved overtime in line with the global situation
and as a consequence to domestic developments. 1991-92 represents a major break in policy when India
harped on reform measures following the balance of payments crisis and shifted to a market determined
exchange rate system. As has been the experience with the exchange rate regimes the world over, the
Reserve Bank as the central bank of the country has been actively participating in the market dynamics
with a view to signaling its stance and maintaining orderly conditions in the foreign exchange market.
The broad principles that have guided India’s exchange rate management have been periodically
articulated in the various Monetary Policy Statements. These include careful monitoring and management
of exchange rates with flexibility, no fixed target or a preannounced target or a band and ability to
intervene, if and when necessary. Based on the preparedness of the foreign exchange market and India’s
position on the external front (in terms of reserves, debt, current account deficit etc), reform measures
have been progressively undertaken to have a liberalized exchange and payments system for current and
capital account transactions and further to develop the foreign exchange market.

Intervention

Intervention by the RBI in the foreign exchange market also plays an important role in influencing
exchange rates in countries that have managed floating regime. With the growing importance of capital
flows in determining exchange rate movements in most emerging market economies, intervention in
foreign exchange markets by central banks has become necessary from time to time to contain volatility
in foreign exchange markets.

The motive of central bank intervention may be to align the current movement of exchange rates with the
long-run equilibrium value of exchange rates; to maintain export competitiveness; to reduce volatility and
to protect the currency from speculative attacks. Many studies in the literature including Edison (1993),
Dominguez and Frankel (1993), Almenkinders (1995) and more recently Sarno and Taylor (2001) and
Neely (2005) survey the literature on modelling the reaction function of the central bank and assessing
the effectiveness of intervention.

Intervention is of two types - sterilised and non-sterilised. Intervention is sterilised if the sale or purchase
of foreign currency is accompanied by expansionary or contractionary open market operations, so that
domestic money supply is insulated from the effects of foreign exchange sale/purchase. Intervention is

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unsterilised if the sale or purchase of foreign currency is not accompanied by offsetting open market
operations. The impact of sterilised and unsterilised intervention on exchange rates can be quite different.

Advantage of Flexible Exchange Rates

Flexible exchange rate system is claimed to have the following advantages:

 Independent Monetary Policy: Under flexible exchange rate system, a country is free to adopt

an independent policy to conduct properly the domestic economic affairs. The monetary policy of

a country is not limited or affected by the economic conditions of other countries.

 Shock Absorber: A fluctuating exchange rate system protects the domestic economy from the

shocks produced by the disturbances generated in other countries. Thus, it acts as a shock

absorber and saves the internal economy from the disturbing effects from abroad.

 Promotes Economic Development: The flexible exchange rate system promotes economic

development and helps to achieve full employment in the country. The exchange rates can be

changed in accordance with the requirements of the monetary policy of the country to achieve the

planned national objectives.

 Solutions to Balance of Payment Problems: The system of flexible exchange rates

automatically removes the disequilibrium in the balance of payments. When, there is deficit in the

balance of payments, the external value of a country's currency falls. As a result, exports are

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 encouraged, and imports are discouraged thereby, establishing equilibrium in the balance of

payment.

 Promotes International Trade: The system of flexible exchange rates does not permit exchange

control and promotes free trade. Restrictions on international trade are removed and there is free

movement of capital and money between countries.

 Increase in International Liquidity: The system of flexible exchange rates eliminates the need

for official foreign exchange reserves, if the individual governments do not employ stabilization

funds to influence the rate. Thus, the problem of international liquidity is automatically solved. In

fact, the present shortage of international liquidity is due to pegging the exchange rates and the

intervention of the IMF authorities to prevent fluctuations in the rates beyond a narrow limit.

 Market Forces at Work: Under the flexible exchange rate system, the foreign exchange rates are

determined by the market forces of demand and supply. Market is cleared off automatically

through changes in exchange rates and the possibility of scarcity or surplus of any currency does

not exist.

 International Trade not Promoted by Fixed Rates: The argument that fixed exchange rates

promotes international trade is not supported by historical facts of inter-war or post-war period.

On the other hand under the flexible exchange rate system, the trend of the rate of exchange is

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 generally assessed through the forward market, and the traders are protected from financial losses

arising from fluctuating exchange rates. This helps in promoting international trade.

 International Investment not Promoted by Fixed Rates: The argument that long-term

international investments are encouraged under fixed exchange rate system is not valid. Both the

lenders and borrowers cannot expect the exchange rate to remain stable over a very long-period.

 Fixed Rates not Necessary for currency Area: This stable exchange rates are not necessary for

any system of currency areas. The sterling block functioned smoothly during the thirties in spite

of the fluctuating rates of the member countries.

 Speculation not Prevented by Fixed Rates: The main weakness of the stable exchange rate

system is that in spite of the strict exchange control, currency speculation is encouraged. This

destroys the stability in the exchange value of the home currency and makes devaluation of the

currency inevitable. For instance, the pound had to be devalued in 1949 mainly because of such

speculation.

DIS-ADVANTAGE OF FLEXIBLE EXCHANGE RATES

The following are the main drawbacks of the system of flexible exchange rates :

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 Low Elasticities: The elasticities in the international markets are too low for exchange rate,

variations to operate successfully in bringing about automatic equilibrating adjustments. When

import and export elasticities are very low, the exchange market becomes unstable. Hence, the

depreciation of the weak currency would simply tend to worsen the balance of payments deficit

further.

 Unstable conditions: Flexible exchange rates create conditions of instability and uncertainty

which, in turn, tend to reduce the volume of international trade and foreign investment. Long-term

foreign investments arc greatly reduced because of higher risks involved.

 Adverse Effect on Economic Structure: The system of flexible exchange rates has serious

repercussion on the economic structure of the economy. Fluctuating exchange rates cause changes

in the price of imported and exported goods which, in turn, destabilise the economy of the

country.

 Unnecessary Capital Movements: The system of fluctuating exchange rates leads to

unnecessary international capital movements. By encouraging speculative activities, such a

system causes large-scale capital outflows and inflows, thus, seriously disturbing the economy of

the country.

 Depression Effects of Capital Movements: Speculative capital movements caused by

fluctuating exchange rates may lead to the problem of extremely high liquidity preference. In a

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 situation of high liquidity preference, people tend to hoard currency, interest rates rise, investment

falls and there is large-scale unemployment in the economy.

 Inflationary Effect: Flexible exchange rate system involves greater possibility of inflationary

effect of exchange depreciation on domestic price level of a country. Inflationary rise in prices

leads to further depreciation of the external value of the currency.

 Factor Immobility: The immobility of various factors of production deprives the flexible

exchange rate system of its advantages arising from the adoption of monetary and other policies

for maintaining internal stability. Such policies produce desirable effects on production and

employment only when supply of factors of production is elastic.

 Failure of Flexible Rate System: Experience of the flexible exchange rate system adopted

between the two world wars has shown that it was a flop.

THE BALANCE OF PAYMENTS AND EXCHANGE RATES

The balance of payments account records all payments to and receipts from foreign countries. The current

account records payments for imports and exports, plus incomes and transfers of money to and from

abroad. The capital account records all transfers of capital to and from abroad. The financial account

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records inflows and outflows of money for investment and as deposits in banks and other financial

institutions. It also includes dealings in the country’s foreign exchange reserves.

The whole account must balance, but surpluses or deficits can be recorded on any specific part of the

account. Thus the current account could be in deficit but it would have to be matched by an equal and

opposite capital plus financial account surplus.

The rate of exchange is the rate at which one currency exchanges for another. Rates of exchange are

determined by demand and supply in the foreign exchange market. Demand for the domestic currency

consists of all the credit items in the balance of payments account. Supply consists of all the debit items.

The exchange rate will depreciate (fall) if the demand for the domestic currency falls or the supply

increases. These shifts can be caused by a fall in domestic interest rates, higher inflation in the domestic

economy than abroad, a rise in domestic incomes relative to incomes abroad, relative investment

prospects improving abroad, or the belief by speculators that the exchange rate will fall. The opposite in

each case would cause an appreciation (rise).

The government can attempt to prevent the rate of exchange from falling by central bank purchases of the

domestic currency in the foreign exchange market, either by selling foreign currency reserves or by using

foreign loans. Alternatively, the central bank can raise interest rates. The reverse actions can be taken if

the government wants to prevent the rate from rising.

In the longer term it can prevent the rate from falling by pursuing deflationary policies, protectionist

policies, or supply-side policies to increase the competitiveness of the country’s exports.

Fixed exchange rates bring the advantage of certainty for the business community, which

encourages trade and foreign investment. They also help to prevent governments from pursuing

irresponsible macroeconomic policies.

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Fixed exchange rates bring the disadvantages of conflicting policy goals, the tendency to lead to

competitive deflation, the problems of ensuring adequate international liquidity to enable

intervention, and the restrictions that fixed rates place upon countries when attempting to respond

to system shocks.

The advantages of free-floating exchange rates are that they automatically correct balance of

payments disequilibria; they eliminate the need for reserves; and they give governments a greater

independence to pursue their chosen domestic policy.

On the other hand, a completely free exchange rate can be highly unstable, especially when the

elasticities of demand for imports and exports are low; also speculation may be destabilizing. This

may discourage firms from trading and investing abroad. What is more, a flexible exchange rate,

by removing the balance of payments constraint on domestic policy, may encourage governments to

pursue irresponsible domestic policies for short-term political gain.

There have been various attempts to manage exchange rates, without them being totally fixed. One

example was the Bretton Woods system: a system of pegged exchange rates, but where devaluations or

revaluations were allowed from time to time. Another was the ERM, which was the forerunner to the

euro. Member countries’ currencies were allowed to fluctuate against each other within a band.

Floating exchange rates lessen the chances of a balance of payments crisis. In a balance of payments crisis, the

value of a currency declines dramatically. The currency is no longer capable of purchasing the same amount of

goods and services as it did before. A floating exchange rate ensures that such a drastic situation does not arise.

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Countries have central banks that try to control the rates of exchange, but often the central banks' intervention is

not much help. Market forces determine the exchange rates.

ARGUMENTS AGAINST FLOATING

EXCHANGE RATES
 The Marshall Lerner Condition is not necessarily met
The problem for countries (LDCs) is that the link between the exchange rate adjustment and the

balance of payments improvement is not as straight forward as the above would suggest. Some

economists would argue with the idea that balance of payments deficits would automatically be

returned to equilibrium under a floating exchange rate system. They argue that the Marshall

Lerner conditions are not met.

 Abolition of exchange controls causes capital flight
The introduction of a floating exchange rate and the abolition of exchange controls lead to

substantial capital flight as wealthy firms attempted to move their finances abroad and convert

their savings into hard currencies held in overseas banks. This leads to purchasing of foreign

currencies reducing the amount available, pushing up its value, and leading to a substantial

depreciation.

 Cost Push Inflationary Pressures

A depreciating currency will help a country's exporting sector. However, the cost of imports will

invariably rise leading to cost push inflationary pressures. Those people whose livelihoods rely on

the consumption of goods with high import content will experience hardship.
 Uncertainty
A wildly fluctuating exchange rate at the mercy of national and international currency speculators

introduces considerable uncertainty to export and import prices and consequently to economic

development

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 SHIFTING TRENDS

48 countries have hard pegs, 60 countries have soft pegs, and 79 countries have floating rates—a marked

change from the early 1990s. Since then, there have been two broad trends in regimes. The first is the

"hollowing out of the middle" that started around 1990 (see chart). At the time, capital flows around the

world had accelerated in response to both the removal of capital account controls and the development of

new financial products and markets. However, inflows to many countries came to a "sudden stop,"

typically in the context of a rising current account deficit, and led to a fall in the demand for their

currencies. In some cases particularly in Western Europe in 1992 and in East Asia during the late 1990s

the demand fell so dramatically that countries ran out of international reserves for defending the peg and

were forced to devalue their currencies. In most cases, they moved to either a hard peg exchange rate,

which is resilient to inflows, or to a float, which precludes the need to commit to a level of the exchange

rate.

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This "hollowing out of the middle" came to a halt in 2001. The period since then has seen a more subtle
shift in countries' exchange rate regime choices. Within the floating group, more countries are now
managing the exchange rate rather than floating independently, and soft pegs have also regained some of
their earlier popularity. Many countries are not able or willing to commit to a hard peg, but neither are
they able to float freely because of gaps in financial markets and because exchange rate changes can
seriously affect countries' balance sheets, inflation, and growth. Moreover, in a number of cases, the de
facto shift toward more tightly managed regimes has occurred without a declared (de jure) change in
exchange rate policies.

WHAT THE FUTURE HOLDS

What can be expected of exchange rate regimes in the future? One country holds that the benefits of

currency blocs groups of countries using a single currency (probably the U.S. dollar, the yen, or the euro)

—are so overwhelming that the number of independent currencies will inevitably dwindle, perhaps to the

single digits. This would simplify cross-country transactions but preclude each country in a bloc from

operating an independent monetary and exchange rate policy.

Another country stresses the benefits of a floating exchange rate and independent monetary policy and

predicts the continued existence of a large number of national currencies tethered to various nominal

anchors. Whether a large number of floating exchange rate currencies remain, or whether they coalesce

into a small number of bloc currencies, will have very different implications for businesses,

policymakers, and owners of surfboard shops.

INDIAN EXCHANGE RATE REGIME

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The Indian exchange rate regime has evolved from an extreme fix to a middle position, but is not yet a
full float. The academic literature has shifted away from advocating corner regimes of a full float or tight
fix for emerging markets towards middling regimes. Much market development is required before a full
float becomes feasible. An exchange rate regime must mature and follow a well-sequenced transition path

The crisis demonstrated that capital flows in response to external events created perverse movements in
the exchange rate. So a full float with free capital movements need not suit the domestic cycle. If capital
flows out during a downturn the exchange rate depreciates increasing export demand and output; as
capital flows in during an upturn the exchange rate appreciation will reduce output thus contributing to
stabilization. But capital moves due to external shocks that may be totally unrelated to domestic
conditions. Moreover, capital movements can be unrelated to fundamentals, sentiment driven, and
excessive.

Despite considerable development, FX markets continue to be thin. So large foreign capital movements
can cause excessive exchange rate fluctuations. If a central bank does not buy/sell a currency that is not
freely traded internationally, sharp spikes occur.

Export competitiveness cannot be ignored when the trade deficit is large. Letting the exchange rate be
driven entirely by volatile capital flows, is dangerous. Full capital account convertibility and float at the
present juncture would be fundamentally unsound.

But the exchange rate’s potential to reverse their effects on inflation should be acted upon, since
temporary supply shocks occur so often. In general, the exchange rate channel of monetary policy
transmission has the shortest lag. Even if several policy instruments are used they can be aligned so the
markets get a clear signal on the policy stance. In India convergence of CPI to WPI inflation is slow.
Their differing composition implies a very different impact on each of food price and oil shocks. So
engineered policy shocks to the exchange rate, can aid convergence.

The past few years have given ample evidence of the impact of the interest rate on aggregate demand.
The steep rise in policy rates prior to Lehman helped cause the crash in industrial output just as the steep

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cut post Lehman led to an unexpectedly fast revival. Since the interest rate is effective so the exchange
rate regime must support a countercyclical interest rate.

Some exchange rate flexibility deepens market and encourages hedging, but excessive change hurts the
real sector. So there should be limits to exchange rate flexibility. Swings beyond a plus minus five
percent invite excessive entry of uninformed traders. But below that level, speculative one-way bets on
the exchange rate rise, since the risk in such bets falls. So a ten percent band is the volatility level a
managed float should aim at. There are other factors that have to be kept in mind. The Rupee cannot
appreciate substantially unless the Rimini does so, since China is a major trade competitor and partner.
The RBI also has to control for the US factor that can influence world macroeconomic variables.

A managed float is the best alternative in current Indian conditions, not a full float.

Findings:
The consequences of policy choices, and suggest the course of action in the current troubled international
waters. Points of RBI intervention during crisis outflows in 2008 slowed the depreciation, but it abstained
from the large-scale sale of dollars that could have moderated the depreciation. Such sale was feasible
given that outflows were much lower than the huge reserves. It was an opportunity to reduce costs of
carrying reserves and to reverse sterilization. In hindsight sustaining appreciation for the duration of the
supply shocks would have been the correct choice since the shocks turned out to be temporary

Two-way movement should apply to reserves also—the latest level should not be seen as a threshold
below, which they should not fall. Since the exchange rate channel to reduce inflation was underutilized,
excessive reliance was placed on the interest rate channel, which deepened the industrial slowdown.
Reducing demand is a costly and inefficient way to respond to external cost shocks

The nominal exchange rate has limited influence on the real exchange rate, which matters for exports.
High domestic inflation appreciates the real exchange rate despite a nominal depreciation. If a nominal
appreciation reduces inflation it may reduce real appreciation, and abort real appreciation if it comes from
an external price shock.

A short-term nominal appreciation need not harm exporters. A large percentage of exporters are naturally
hedged against an appreciating rupee since they import intermediate goods. Software exporters, who do
not have this advantage, actively hedge currency risk in markets.

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In the longer-run, the real exchange rate must be competitive. India’s 36-country real effective rate has
not appreciated much compared to its level in the early nineties. But if the rise in average wages exceeds
that in productivity, the level of the real exchange rate consistent with low inflation may be more
appreciated. Otherwise a nominal depreciation will raise imported and domestic food prices, and lower
real wages. Since food is a large share of the domestic consumption basket, nominal wages will
18rise.This will raise prices and appreciate the real exchange rate. Only accepting the real appreciation or
raising productivity could break the price-wage cycle. The issue is important given India’s two- year
battle with high food prices, rising average wages, and an expected rise in international food prices.

Nominal overshooting will also reduce the pull of the interest differential, which is contributing to a
dangerous rise in India’s short-term debt. If the exchange rate overshoots, it is expected to depreciate
lowering arbitrage flows. Of course, this needs to be complemented by strategic use of controls since
higher growth in emerging markets and continued accommodated in the West will send large inflows into
India.

CONCLUSIONS

The paper has concentrated on a number of inflation related issues, in particular, the capacity of a floating

exchange rate to insulate the economy from foreign price shocks, the consequences if this does not work,

the role of exchange rate targeting in anti-inflationary policy and the appropriate goal for inflation policy.

In addition, the relation between wages policy and the depreciation, between the exchange rate and the

current account and the role of exchange market intervention have also been discussed.

Since the float, the country’s economy appears to have independently generated its own monetary

conditions and inflation rate. This and other evidence strongly suggests that the float has involved a

reasonable degree of monetary independence and that insulation has worked. Moreover, in addition to the

standard mechanism of the exchange rate moving to provide insulation from foreign price shocks,

another influence appears to help absorb these shocks. This is the phenomenon of ‘pricing to the market’

which enables the smoothing of domestic price movements in importable and exportables.43 If there is a

reasonable degree of price insulation there is no need for the authorities to target the exchange rate, for

instance by resisting depreciation, for anti-inflationary purposes. On the other hand, when there are

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significant inflationary foreign price shocks and insulation is incomplete, inflation will be imported.

Reversing this without producing excess supply is likely to be a difficult problem for macroeconomic

policy. Alternatively, to the extent that insulation allows some proportion of foreign currency price

increases to affect domestic prices, this could be accommodated in the interest of sustaining domestic real

equilibrium. For this and other reasons, the pursuit of equilibrium in the market for non-traded goods

would seem a worthwhile strategy. Besides its intrinsic benefits, it could also mean a reasonable degree

of stability of the price of non-traded goods when insulation works or when foreign price shocks are

absent. When there is significant foreign price inflation and insulation does not work, it is a viable

alternative to price stability and disequilibrium

Finally, the topic is large and a number of interesting and important issues have not been covered. In

particular, apart from foreign currency traded goods price shocks, the tendency for the economy to

experience similar growth cycles to other OECD countries and the role of the exchange rate mechanism.

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 The Bottom Line

Although the peg has worked in creating global trade and monetary stability, it was used only at a time

when all the major economies were a part of it. While a floating regime is not without its flaws, it has

proven to be a more efficient means of determining the long-term value of a currency and creating

equilibrium in the international market.

Books referred

Exchange Rate Economics- Ronald MacDonald

BIBLIOGRAPHY

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http://www.investopedia.com/terms/f/floatingexchangerate.asp

http://www.preservearticles.com/201012291898/advantages-disadvantages-flexible-exchange-rates.html

http://en.wikipedia.org/wiki/Exchange-rate_flexibility

http://financial-dictionary.thefreedictionary.com/Flexible+Exchange+Rate

http://www.treasury.gov/resource-center/international/exchange-rate-

policies/Documents/Appendix_2.pdf

http://www.abc.net.au/money/currency/features/feat10.htm

http://www.slideshare.net/whatthechuck91/fixed-versus-flexible-exchange-rate-arrangements