Fixed Exchange Rate Systems
Fixed Exchange Rate Systems require active intervention by the government to keep the currency value stable.
A country can create a fixed exchange system by:
- Implementing a gold standard (the currency can be converted to gold);
- Using a currency board to manage the money supply and keep the domestic currency value stable in relation to some foreign currency.
- Pegging the currency to value of another currency and allow the central market to conduct monetary policy to maintain the peg.
A peg system reduces exchange rate volatility, but the system also forces economic shocks to be absorbed by the economy and not the currency, as real interest rates may spike in response to a sharp change in the amount of funds available for investment. Also, speculators can attack pegged currencies.
Crawling pegs target a path for the exchange rate, as opposed to a fixed rate.
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- CFA Level 2: Economics - Introduction
- Economic Growth
- Changes in Productivity: The One-Third Rule
- The Productivity Curve
- Economic Growth Theories
- Government Regulation, Deregulation, and Regulatory Behaviour
- Gross Domestic Product (Measuring Economic Activity)
- International Trade & Trade Restrictions
- Balance of Payments
- Foreign Exchange Rate Systems and Parity Relationships
- Foreign Exchange Floating Rate Systems
- Fixed Exchange Rate Systems
- Overview of Currency Markets
- Forward Exchange Rates
- Interest Rate Parity
- Purchasing Power Parity (PPP)
- International Fisher Relation
- Uncovered and Covered Interest Rate Parity Relationship
- Forecasting Exchange Rates
- CFA Level 2 Economics – Recommendations