Fixed exchange rate is an exchange-rate system in which a State sets a long-term fixed exchange ratio to other foreign currency units, gold, or a basket of currencies in domestic currency. One method to guarantee a fixed exchange rate are currency boards. A well-known example was the exchange rates of the countries of the CMEA.
In principle, the different exchange rate regimes are divided into floating exchange rates, which set the value of currencies to each other and represent interventions by central banks.
Crawling pegs are exchange rate pegs with regular Increases or decreases in response to a particular index (eg divergence in inflation rates between domestic and foreign). Both on – and write-downs are previously announced to provide a reliable basis for exchange rate expectations and counter currency speculation (Best Forex VPS).
Pegs are adjustable exchange rate pegs with irregular, previously announced Increases or decreases, where parity changes are allowed (fixed exchange rate system with gradual flexibility). For example, in the structural balance of payments imbalances.
Foreign exchange spreads
Foreign exchange spreads (relatively fixed exchange rates, bandwidth fixed exchange rates) are fixed exchange ratios between currencies (parity) and fluctuation (intervention time points). Within the range of variation, the rates determined by supply and demand as shown by the Best Forex VPS.
Applications and operation
When depreciation is experienced, then the price of foreign exchange purchases by the central or central bank must be supported. The central bank would have to make their own money and thus increase the monetary base. The demand gap may not be satisfied in the long run by the central bank, otherwise the risk of inflation threatens, even if the balance of payments surpluses exist.
If the exchange rate would rise, here, the central bank would move and thus reduce the monetary base. If necessary, a devaluation of the exchange rate would occur because of the risk of insolvency of their own country.
The managed floating exchange rate is an exchange rate regime where the exchange rate fluctuates basically freely, but the central bank intervenes every now and then, to accomplish their exchange rate target. Unlike fixed exchange rates, the central bank is not required to hold a certain stable rate, so it can respond more flexibly.
After the Asian crisis, many of the affected countries switched to managed floating currencies. In a system of fixed exchange rates these procedures are performed dutifully and aim to reach at least the specified intervention points above or below a mean rate. In the long term by the exchange rates fluctuate within relatively low bandwidths.