Fixed vs. Floating — Types of Exchange Rate Regimes
In some countries the exchange rate swings even within a single day, while in others it has been fixed at '$1 = a set value' for years. It is the same 'exchange rate,' so why is it so different? What makes the difference is the 'exchange rate regime.'
'Who sets the rate' is the core of the regime
Exchange rate regimes form a spectrum between two extremes.
At one end is the 'fixed rate (peg).' The government or central bank sets a value—'our currency is $1 = X'—and buys and sells foreign exchange to defend that value. The 'currency board,' where the Hong Kong dollar is pegged to the U.S. dollar, is an example of a strong form.
At the other end is the 'floating rate.' The rate rises and falls freely according to market supply and demand. An 'independent float,' in which the government does not intervene in principle, falls here.
Most countries lie somewhere in between. Korea is closer to a 'managed float,' where the rate is set by the market but authorities apply 'fine-tuning (smoothing)' when it moves sharply.
Source: IMF 'Exchange Rate Regimes: Fix or Float' (Finance & Development). In practice the IMF classifies more finely into 8 categories.
The IMF's 8 categories — a ladder of flexibility
The IMF divides exchange rate regimes roughly like this, in order of increasing flexibility.
① No separate legal tender (using the dollar, etc. directly) ② Currency board ③ Conventional peg ④ Pegged within a band ⑤ Crawling peg (adjusted little by little at a set pace) ⑥ Crawling band ⑦ Managed float (no preannounced path) ⑧ Independent float.
The higher up, the closer to a 'value-locked' fixed rate; the lower down, the closer to a 'left-to-the-market' float. Grouped broadly, there are three: hard pegs, soft pegs, and floats.
Recently, it is observed that there are more countries that 'manage' the rate to some degree than countries with a fully 'independent float.'
Source: IMF Working Paper 09/211 'Revised System for the Classification of Exchange Rate Arrangements.'
The advantages and 'hidden costs' of each regime
The advantage of a fixed rate is 'predictability.' When the rate is stable, it is easy to plan trade and investment, and import prices are stable too.
But there is a cost. To defend the rate, the central bank must give up a large part of its freedom over interest-rate policy. Also, if the market judges that 'that peg cannot hold' and launches a speculative attack, foreign reserves can drain and the peg can collapse in an instant. A representative case is Thailand abandoning its baht peg during the 1997 Asian financial crisis.
The advantage of a floating rate is 'shock absorption.' When a crisis comes, the rate adjusts on its own, serving as a buffer for the economy. In exchange, exchange-rate volatility grows, so 'exchange-rate risk' always follows those who invest abroad.
よくある質問
Q. What does the 'impossible trinity' mean?
It is the principle of international finance that you cannot simultaneously have all three of: ① a fixed exchange rate, ② free capital movement, and ③ independent monetary policy. For example, if you want to fix the exchange rate and let money flow freely, you must give up the freedom to set interest rates as you please. It is a concept that shows why choosing an exchange rate regime is a 'trade-off.'
Q. Is Korea a fixed-rate or a floating-rate country?
Korea shifted to a free-floating exchange rate system after the 1997 financial crisis. In principle the rate is set by the market, but it is closer to a 'managed float' in which authorities intervene (smoothing) to reduce volatility when there is a sharp one-way move. That is why the won–dollar rate rises and falls every day.
関連ページ
📋 結果は過去のデータに基づくものです。過去のリターンは将来のリターンを保証しません。
📋 本サービスは投資アドバイスではなく、投資を理解するための教育目的で提供されています。