What is the exchange rate regime?
The exchange rate regime is the way the country controls, how its currency concerns the other countries. The most common types of exchange rate mode are floating, bound and fixed rate. Each has its advantages and disadvantages in terms of country control over its own economy and global financial situation.
The most common exchange rate regime in developed countries is now a floating rate. In its purest form, this means a exchange rate between the currency of the country and the measure of other countries is exclusively a free market. In fact, many countries have politics that their cash register or central bank are buying and selling currency if they believe it is necessary to do so to avoid extreme exchange rate fluctuations that would otherwise create a free market. This policy is known as managed or dirty float.
Variations on this exchange Rate mode is bound float. This is where the country allows the market to determine the exact rate but OMIt eases movement on certain levels above or below a fixed point. In most cases, this fixed point is revised from time to time, giving the government some control over the movement of the currency. This was used when the government wants to make significant changes to the exchange rate without doing so in one step or letting a free market to adapt too quickly and cause the government to lose control.
Another exchange rate regime is a fixed or tied rate. This is where the exchange rate does not call on the market and instead is determined by a certain rate against one or more currencies or commodities. For example, the country could correct the rate so that its currency unit is permanently worth two US dollars. This is usually possible only where the country has the ability to control trading in its currency.
The best known exystem with a fixed rate was the Bretton Woods system. It was a system introduced after World War II, by which countries by the Allied Party fixed its exchange courses, so each unit of currency was worth setthe amount of gold. With the fixed price of gold, the currency of each participating country was also set against the dollar, which provided them with stability and protected them from a sudden increase or decline in the value of their money around the world. The scheme ended at the beginning of the 70s when the price of gold could float freely.