fixed exchange rate system

fixed exchange rate system

a mechanism for synchronizing and coordinating the EXCHANGE RATES of participating countries which involves each country setting a fixed par value for its currency against other countries' currencies; for example, 1 US dollar = 260 Japanese yen. Once an exchange rate value is fixed, countries are expected to maintain this rate for fairly lengthy periods of time, but may choose to devalue their currency (repeg the exchange rate at a new lower rate – see DEVALUATION) or revalue it (repeg the exchange rate at a new higher value – see REVALUATION, definition 2) if their BALANCE OF PAYMENTS is, respectively in chronic deficit or surplus. Fixed exchange rates are maintained by the country's CENTRAL BANK intervening in the FOREIGN EXCHANGE MARKETS on a day-to-day basis, using its foreign exchange equalization account to buy and sell currencies as appropriate to stabilize the rate around its central par value.

The INTERNATIONAL MONETARY FUND formerly operated a system of fixed exchange rates, as did most members of the European Union under the fixed exchange rate requirements of the EUROPEAN MONETARY SYSTEM. Generally speaking, the business and financial community prefer a relatively fixed exchange rate to FLOATING EXCHANGE RATES, since it enables them to conclude trade and financial transactions at known foreign exchange prices so that the profit and loss implications of these deals can be calculated in advance. The disadvantage with such a system is that governments often tend to delay altering the exchange rate, either because of political factors or because they may choose to deal with balance of payments difficulties by using other measures, so that the pegged rate gets seriously out of line with underlying market tendencies. In consequence, for example, a firm's exports may become progressively less price-competitive in foreign markets because the country's currency is ‘overvalued’. See ECONOMIC POLICY.

References in periodicals archive ?
Heavy intervention was witnessed in the beginning of 1973 by developed economies to smoothly shift from the Bretton Woods fixed exchange rate system to free float.
The fixed exchange rate system that Egypt followed over the past decades has caused the Egyptian banking system to lose control over foreign exchange flow which was controlled by the unofficial market," Abdel Aal said.
Therefore, the fixed exchange rate system of the Qatari Riyal linked to US dollar helps achieve stability in Qatar's public revenues, he said.
Moreover, recent experiences (such as the Argentinian crisis in 1975, European Monetary System in 1992, Mexico in 1994, Southeast Asia in 1997, Russia in 1998, Argentina in 2002, Iran in 2012 and Russia in 2014) have shown the increasing difficulty countries face in building the reputation needed to sustain a fixed exchange rate system.
South Africa, like other sub-Saharan African countries, maintained a fixed exchange rate system during this period, which started in 1944 and ended in the early 1970s.
A monetary union is a hybrid between a fixed exchange rate system and a unitary state, one that is fully captured neither with closed-economy macro models nor classical international macro models of fixed exchange rates.
Overall, the liquidity management was well balanced in controlling inflation and sustaining growth momentum in the medium term within the limited scope of pursuing independent monetary policy under a fixed exchange rate system, it stated.
Qatar operates a fixed exchange rate system with the Qatari riyal pegged to the dollar at $1 = QR3.
By extension, the fixed exchange rate system to eliminate foreign exchange rate risk is irrelevant.
An expensive fixed exchange rate system has fed the need to issue more debt in order to control imported inflation.
Government's possible future action depends on relative size of losses under different policy regimes and, although a fixed exchange rate system can bring about price stability, the flexible exchange rate system is a more attractive alternative as long as the cost of the exchange rate adjustments is not very high.
The president of the European Council has reopened the debate, decided by the 44 founding countries of the fixed exchange rate system in Bretton Woods, New Hampshire in 1944, based on the gold standard, and only transformed by Richard Nixon in 1971.

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