CURRENT EXCHANGE

RATE REGIME
INTERNATIONAL
FINANCIAL MANAGEMENT SUBMITTED BY ;
PRESENTATION AAMIR MUSTAFA KHAN
NASIR REZA
MOHD ABDULLAH
ALLOTTED BY; MOHD NATIQUE
PROF. SANA BEG QAZI SAHIL SIDDIQUE
 WHAT IS EXCHANGE RATE
REGIMES ?
• Exchange rate regime refers to the ‘way’ the value of the domestic currency in
terms of foreign currencies is determined.

• It is closely related to monetary policy and the two are generally dependent on
many of the same factors.

• Exchange rate regimes can broadly be categorized into two extremes, namely
fixed and floating.
 Evolution of the International Monetary System

• Bimetallism Prior to 1870

• Gold Standards 1870 to 1914
• Inter-war Period 1914 to 1944
• Bretton Woods System 1944 to 1972
• Flexible/Float exchange rate system 1973 to till now
 WHAT IS FIXED EXCHANGE RATE REGIME ?
• The governments of the countries where such a system exists maintain the exchange rate
by actively buying and selling their currencies in the foreign exchange market whenever
their exchange rates fluctuate from the stated par value.
MERITS & DEMERITS OF FIXED EXCHANGE RATE REGIMES :
ADVANTAGES DISADVANTAGES
It gives the exchange rates stability and eliminated source uncertainty and price Require regular control and
instability. monitoring
Exchange rate volatility was controlled as it insulated the economy towards economic Not self-equilibrating
disturbances.
Foreign investors were encouraged to invest in countries without the fear of exchange Economic problem due to
rate. devaluation in currencies.
It provided an environment in which more efficient allocation of resources becomes
easy.
Poor nations could get foreign exchange for development purposes at low costs.
 WHT IS FREE FLOAT EXCHANGE RATE REGIME ?
In a free market, exchange rates are determined by the interaction of currency supplies and
demands. For example, in India, there are more imports from America. So there will be more
demand of American dollars. If the exports are less as compared to imports, there will be a gap
in demand and supply of dollars, leading to a fluctuation in the exchange rate. This system is
also called a clean float.
Merits & demerits of FREE FLOAT EXCHANGE RATE REGIME
ADVANTAGES DISADVANTAGES

No need for intervention management of exchange rates. Higher volatility

No need for frequent central bank intervention. Use of scare resources to predict exchange rates

No need for elaborate capital flow restrictions. Tendency to worsen existing problems.

Greater insulation from other countries economic problems.

 What is Managed float (Dirty
float)?
“A system that allows a nation’s central bank to intervene regularly in foreign
exchange markets to change the direction of the currency’s float and /or
reduce the amount of currency volatility.“
~ tutor2u.net

Objectives –
> To steady the market at times of economic uncertainty.
> To support an under attack currency.

• India has a managed float exchange rate system.

• A managed float system isn't considered to be a true floating exchange rate system.  
 No separate legal tender
“The currency of another country circulates as the sole legal tender, or the member
belongs to a monetary or currency union in which the same legal tender is shared by
the members of the union”.
~ imf.org

(Formal dollarization)
 Target Zones and Crawling Pegs
Target Zones – Certain countries pledge to maintain their currency exchange rate within a specific
fluctuation margin or band.
Strong version – The exchange rate, fluctuates within margins of ±1% or less.

Weak version – The exchange rate fluctuates more than ±1% around the fixed central rate.

A fixed par value of the currency which is frequently revised.

Crawling Pegs

Adjusted due to market factors such as inflation; and a band of

rates within which it is allowed to fluctuate.
 Currency board
• A currency board is an extreme form of a pegged exchange rate
• This monetary authority has direct instructions to back all units of domestic currency in
circulation with foreign currency
• Currency boards offer stable exchange rates, which promote trade and investment
In a crisis
• A currency board can cause substantial damage by restricting monetary policy.
 Conventional peg
• A currency peg is a policy in which a national government sets a specific fixed exchange rate for its
currency with a foreign currency or basket of currencies
• A realistic currency peg can reduce uncertainty, promote trade, and boost incomes
• An overly low currency peg keeps domestic living standards low, hurts foreign businesses, and
creates trade tensions with other countries
• An artificially high currency peg contributes to the overconsumption of imports, cannot be sustained
in the long run, and often causes inflation when it collapses
• The United States has exchange rate arrangements with 38 countries, with 14 pegging their
currencies to the USD.
 Stabilized arrangement
• An arrangement where the spot rate remains within a margin of 2% for 6months or more.
• There can be a small number of specified outliers.
• There is no actual policy commitment.
• Example: Vietnam
 Crawling peg
Classification as a crawling peg involves the confirmation of the country authorities’ de jure
exchange rate arrangement. The currency is adjusted in small amounts at a fixed rate or in
response to changes in selected quantitative indicators, such as past inflation differentials vis-
à-vis major trading partners or differentials between the inflation target and expected
inflation in major trading partners. Examples are Bolivia and Nicaragua.

Crawl-like arrangement
The exchange rate must remain within a narrow margin of 2 percent relative to a statistically
identified trend for six months or more (with the exception of a specified number of outliers), and the
exchange rate arrangement cannot be considered as floating. Usually, a minimum rate of change
greater than allowed under a stabilized (peg-like) arrangement is required. Ethiopia, China, and
Croatia are examples.
 Pegged exchange rate within horizontal bands
The value of the currency is maintained within certain margins of fluctuation of at least 61 percent
around a fixed central rate, or the margin between the maximum and minimum value of the
exchange rate exceeds 2 percent. Tonga is the only example.

Other managed arrangement

This category is a residual, and is used when the exchange rate arrangement does not meet the criteria for
any of the other categories. Arrangements characterized by frequent shifts in policies may fall into this
category. Examples are Costa Rica, Switzerland, and Russia.
THANKS TO ALL OF YOU