Exchange Rate Mechanisms
INTRODUCTION
An exchange rate is the price at which one country's currency must pay in order to buy one unit of another county’s currency on the foreign exchange market. The concept of exchange rate mechanism may be explained as the technique employed by the governments in order to manage and control their respective currencies in the context of the other major currencies of the world.
There are 5 exchange rate mechanisms established which each of it is meant to be followed by government regarding to the management and determination of exchange rate in regards of the foreign exchange market and foreign currencies. These 5 exchange rate mechanisms consist of namely free float system, managed float system, target-zone arrangement system, fixed-rate system, and hybrid system.
Each system has possessed distinct features, benefits and costs. Free float system’s exchange rate is determined freely by market condition, flow of demand and supply for currency. Managed float system’s exchange rate is similar with free float system which the exchange rate is freely floating depending on market’s condition, demand and supply but the feature that differs is the involvement of central bank intervention to smooth out currency fluctuations for a managed float system.
Fixed exchange rate system’s exchange rate is pegged to a major currency of another country at a specific and fixed rate of exchange, which the exchange rate is managed from fluctuation of a certain margin percentage and maintained back to the fixed exchange rate. Target zone arrangement system is a combination of the pegged and floating exchange rate, which exchange rates is maintained within a range of fixed exchange rate. Hybrid exchange rate system is the combination of free float, managed float, and fixed exchange rate systems. Under a hybrid exchange rate system, different countries adopt different exchange rate policy depending on their economic condition and economic goals to be achieved.
The occurrence of
An exchange rate is the price at which one country's currency must pay in order to buy one unit of another county’s currency on the foreign exchange market. The concept of exchange rate mechanism may be explained as the technique employed by the governments in order to manage and control their respective currencies in the context of the other major currencies of the world.
There are 5 exchange rate mechanisms established which each of it is meant to be followed by government regarding to the management and determination of exchange rate in regards of the foreign exchange market and foreign currencies. These 5 exchange rate mechanisms consist of namely free float system, managed float system, target-zone arrangement system, fixed-rate system, and hybrid system.
Each system has possessed distinct features, benefits and costs. Free float system’s exchange rate is determined freely by market condition, flow of demand and supply for currency. Managed float system’s exchange rate is similar with free float system which the exchange rate is freely floating depending on market’s condition, demand and supply but the feature that differs is the involvement of central bank intervention to smooth out currency fluctuations for a managed float system.
Fixed exchange rate system’s exchange rate is pegged to a major currency of another country at a specific and fixed rate of exchange, which the exchange rate is managed from fluctuation of a certain margin percentage and maintained back to the fixed exchange rate. Target zone arrangement system is a combination of the pegged and floating exchange rate, which exchange rates is maintained within a range of fixed exchange rate. Hybrid exchange rate system is the combination of free float, managed float, and fixed exchange rate systems. Under a hybrid exchange rate system, different countries adopt different exchange rate policy depending on their economic condition and economic goals to be achieved.
The occurrence of