floating exchange rate

(redirected from Flexible Exchange Rates)

Floating exchange rate

A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.

Floating Exchange Rate

The exchange rate in which the value of the currency is determined by the free market. That is, a currency has a floating exchange rate when its value changes constantly depending on the supply and demand for that currency, as well as the amount of the currency held in foreign reserves. An advantage to a floating exchange rate is that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile depending on the particular currency. A currency with a floating exchange rate may undergo currency appreciation or currency depreciation, depending on market fluctuations. A floating exchange rate is also called a flexible exchange rate. See also: Fixed exchange rate, Crawling peg, Managed float.

floating exchange rate

An exchange rate between two currencies that is allowed to fluctuate with the market forces of supply and demand. Floating exchange rates tend to result in uncertainty as to the future rate at which currencies will exchange. This uncertainty is responsible for the increased popularity of forward, futures, and option contracts on foreign currencies. Also called flexible exchange rate. Compare fixed exchange rate.
References in periodicals archive ?
To support his views, the CBN governor noted that for nearly a decade, a brilliant Harvard Professor of Economics kept publishing several papers showing that fully flexible exchange rates do not always lead to optimal economic outcomes.
One condition of the programme is having flexible exchange rates. This means the government should not intervene in the foreign currency market and let the forces of demand and supply decide the dollar's rate against the rupee.
The incoming administration has indicated that key economic factors, including central bank autonomy, flexible exchange rates and inflation-targeting monetary policy regimes would remain in place as part of stated policy goals from his national plan published during the campaign.
Commenting on the appointment of Harvard Professor Gita Gopinath as the new IMF chief economist, London-based The Economist wrote on October 6 'the appointment puts another pillar of orthodoxy regarding the benefits of flexible exchange rates on notice.'
In 1973, the productivity and exchange-rate volatility interconnection became very important due to the adoption of floating and flexible exchange rates by different countries.
These developments have led some to conclude that a steady rules-based international monetary system is literally impossible, at least one built on the three-pillar foundation of flexible exchange rates, open capital markets, and an independent rules-based monetary policy in each country.
The Optimal Currency Areas (OCA) theory pioneered by Mundell (The American Economic Review, 1961) arose in the early sixties of the last century as an extension of the literature on the choice between fixed or flexible exchange rates. As noticed by McKinnon (Journal of Common Market Studies, 2004) and De Grauwe {Journal of Common Market Studies, 2006), there is an apparent contradiction in Mundell's theories regarding currency unions.
Economists like flexible exchange rates because they allow financial markets -- rather than governments -- to set the prices of currencies.
It made passing reference to the need for flexible exchange rates, pledging to "stick to our previous exchange rate commitments".
It may seem that fixed versus flexible exchange rates dilemma in the period of increased global uncertainty and negative trends in the global economy became alive again while discussions on policy issues, challenges and controversies may find it difficult to provide clear suggestions.
uCaA change in export prices has a greater impact on the debt-to-GDP ratio of countries with flexible exchange rates than it does on those with fixed exchange rates.
Two options are available: fixed or flexible exchange rates. Both are examined in this paper.

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