Question

"Managed float is superior to pegged exchange rate system because it converses foreign exchange reserves in case of speculative attacks on the currency" - Comment with reason

Answer 1

Managed float is better than pegged currency exchange rate system because it is conversing with the exchange rate reserve in case of speculative attack on the currency because it is providing a high flexibility to the central banks in order to use the crawling peg in order to intervene into the foreign exchange markets by continuously buying and selling the foreign exchange and they are always trying to manage the currency within particular range so they are trying to protect the currency from any kind of a speculative attacks. This managed float are always helpful for them in order to maintain their balance of payment and foreign exchange reserve in a better manner and it will also help them to support the economy in a better way by being managed floating economy.

In pegged exchange rate system, there is always a fixation of the currency rate in respect to the other currencies so there is no benefit in relation to balance of payment and management of the foreign reserve and hence they cannot help themselves in order to manage their foreign reserves in a better way because they are already rigid in fixation of their interest rate and hence they are not able to benefit from any kind of fluctuations in the foreign exchange market because they are not providing with the managed float.

Hence managed float is better than pegged currency.