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The exchange rate regime

Category — General Notions

The exchange rate regime is a system of formation of ratios of the exchange rate of the national currency in relation to the foreign one. The role that the exchange rate plays in the functioning of the economic system, as well as its place in the system of macroeconomic regulation measures, largely depends on which exchange rate regime the state chooses, in particular, how much the state is ready to influence the formation of the exchange rate.

If the state does not intervene at all, the exchange rate is said to be free-floating. If at certain moments the central bank of the country turns on the mechanisms of influence, the rate is called managed floating, and if the state sets the rate rigidly, it is called fixed.

The floating exchange rate is formed under the influence of supply and demand for the currency. The Central Bank does not fix the target exchange rate of the national currency or the range of fluctuations. However, when the exchange rate jumps sharply, for example, against the backdrop of political news, the central bank can buy or sell currency on the domestic market to smooth out these fluctuations.

A managed floating exchange rate is partially controlled by the central bank, for example, a currency band is established. If the rate goes beyond the corridor, then the central bank begins to intervene - to buy or sell foreign currency.

The fixed exchange rate is tightly controlled by the central bank. Under this regime, the exchange rate of the national currency is tied to a foreign currency or a currency basket in a certain ratio.
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