A fixed exchange rate, is sometimes also referred to as a pegged exchange rate. It is a type of exchange rate regime in which a value of one currency is matched to the value of another single currency or to a group of other currencies, or it may also be matched to another measure of value, such as gold.
In order to stabilize the value of a currency a fixed exchange rate is usually used, vis-a-vis the currency it is pegged to. The trade and investments between the two countries is facilitated by this exchange rate regime, and it is particularly useful for small economies where external trade constitutes a large part of their GDP.
This exchange rate regime is also used as a means by which inflation is controlled. However, as there is arise and fall in the reference value, so does the same rise and fall is shown by the currency pegged to it. In addition to this, in order to achieve macroeconomic stability the use of domestic monetary policy by the government is prevented by a fixed exchange rate.
Maintaining a Fixed Exchange Rate
Typically, if a government is willing to maintain a fixed exchange rate then this can be done either by buying or selling its own currency on the open market. This is one of those reasons due to which governments maintain reserves of foreign currencies.
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Tagged as:
balance of trade,
black market in foreign currency,
Capital Control,
control of inflation,
Criticisms,
currencies,
currency conversion,
current account transactions,
domestic currency,
domestic market,
dynamics of balance of payment,
exchange rate regime,
FDI,
fixed exchange rate,
Fixed Exchange Rate Regime vs. Capital Control,
foreign currency,
GDP,
inflation,
macroeconomic stability,
Maintaining a Fixed Exchange Rate,
means of maintaining a fixed exchange rate,
pegged exchange rate,
reserves of foreign currencies,
small economies,
stability of the economy system,
trade deficit
The way a country manages its currency in respect to foreign currencies and the foreign exchange market is referred to as the exchange rate regime. It has a close relation with monetary policy and the factors on which the two depends are generally the same.
The basic types of exchange rate regime are
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floating exchange rate, where the movements of the exchange rate are dictated by the market,
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pegged float, where the central bank is the authority that keeps the rate from deviating too far from a target band or value,
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fixed exchange rate, by which the currency is tied to another currency, mostly more widespread currencies such as the U.S. dollar or the euro.
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Crawling bands,
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currency,
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exchange rate regime,
fixed exchange rate,
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foreign currencies,
foreign exchange market,
foreign reserves,
pegged float,
Pegged with horizontal bands
