Exchange Rate Classifications
Exchange Rate Classifications : Following are the different types of possible exchange rate regimes and how they work:: Single Currency Peg: the country pegs to a major currency -- usually the U.S. dollar or the French franc -- with infrequent adjustment of the parity; Composite Currency Peg: the country pegs to a basket of currencies of major trading partners to make the pegged currency more stable than if a single currency peg were used. The weights assigned to the currencies in the basket may reflect the geographical distribution of trade, services, or capital flows. They may also be standardized, as in the Special Drawing Right (SDR) and the European Currency Unit (ECU); Limited Flexibility vis-a-vis a Single Currency: the value of the currency is maintained within certain margins of the peg; Limited Flexibility Through Cooperative Agreements: this applies to countries in the exchange rate mechanism of the European Monetary System and is a cross between a peg of individual EMS currencies to each other and a float of all these currencies jointly vis-a-vis non-EMS currencies; Greater Flexibility Through Adjustment to an Indicator: the currency is adjusted more or less automatically to changes in selected indicators. A common indicator is the real effective exchange rate, which reflects inflation-adjusted changes in the currency vis-a-vis major trading partners; Greater Flexibility Through Managed Float: the central bank sets the rate but varies it frequently. Indicators for adjusting the rate include, for example, the balance of payments position, reserves, and parallel market developments. Adjustments are not automatic; Full Flexibility Through an Independent Float: rates are determined by market forces. Some industrial countries have floats -- except for the EMS countries -- but the number of developing countries in this category has been increasing. See: Crawling Peg System Exchange Rate
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