What are Fixed Exchange Rates?
Fixed exchange rates refer to a system in which the value of a country’s currency is fixed or pegged to the value of another currency or a basket of currencies. Under a fixed exchange rate regime, the government or central bank actively intervenes in the foreign exchange market to maintain the exchange rate at a predetermined level.
Key Characteristics of Fixed Exchange Rates:
- Government Intervention: In a fixed exchange rate system, the government or central bank plays a proactive role in regulating the value of the domestic currency.
- Pegged Rate: The exchange rate is pegged or fixed at a specific value relative to another currency, such as the US dollar, or a basket of currencies. This fixed rate is announced and maintained by the monetary authorities.
- Stability: Fixed exchange rates provide stability and predictability in international trade and finance. Businesses can plan their transactions with confidence, knowing that exchange rates will remain constant over the short term.
Difference between Fixed and Flexible Exchange Rates
Understanding the differences between fixed and flexible exchange rates is essential for grasping the dynamics of currency markets, assessing their impact on economic performance, and navigating the complexities of international financial systems.