Lesson 6 of 9 · All lessons in this module
- The FX market: functions and participants
- Reading exchange rate quotes
- Percentage changes in exchange rates
- Nominal and real exchange ratesVideo lesson
- Why no currency regime is ideal
- The menu of exchange rate regimes
- Exchange rates, the trade balance and capital flows
- Capital restrictions
- Integrated cases: reading an FX and capital-flow brief
Lesson 6 of 9 · 15 min
The menu of exchange rate regimes
Regimes run from giving up your own currency, through currency boards, pegs, zones and crawls, to managed and free floats, and each step toward flexibility buys monetary freedom at the cost of exchange rate stability.
In short
- No separate legal tender: dollarization (use another country's currency) or a monetary union (share one, e.g. the euro). No national monetary policy.
- Currency board: legal commitment to a fixed rate with the monetary base fully backed by foreign reserves; no lender of last resort, but the board keeps seigniorage.
- Fixed parity: no legal commitment, discretionary reserves, band of about ±1%. Target zone: wider band, about ±2%.
- Crawling peg: frequent small adjustments; passive to match inflation, active pre-announced to steer expectations. Crawling bands: a peg with gradually widening bands, a path out of a fixed rate.
- Managed float ('dirty float'): intervention toward unstated targets. Independent float: the market sets the rate; full monetary independence.
- Classifications are not rigid: even floaters intervene, and regimes change over time.
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