101 Concepts for the Level I Exam
Concept 36: Exchange Rate Regimes
Exchange rate regimes for countries that do not have their own currency:
- Formal dollarization: A country uses the currency of another currency, typically the US dollar.
- Monetary Union: Several countries use a common currency.
Exchange rate regimes for countries that have their own currency:
- Currency board system: An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.
- Fixed parity: A country pegs its currency within margins of 1% vs. another currency.
- Target zone: Like fixed parity but with wider bands (+/- 2%); gives monetary authority more flexibility.
- Crawling peg: Exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg.
- Managed float: Monetary authority attempts to influence the exchange rate in response to specific indicators – balance of payments, inflation rates, or employment – without any specific target exchange rate.
- Independently float: Exchange rate is entirely market-driven.