Fixed Exchange Rate Systems
Fixed Exchange Rate Systems require active intervention by the government to keep the currency value stable.
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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.
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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.
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Crawling pegs target a path for the exchange rate, as opposed to a fixed rate.
