Question

Explain the difference between a fixed rate and a managed rate foreign exchange rate regime and their advantages and disadvantages. Using an example explain how governments under a managed floating rate regime intervene to get their FX rate in line using a sterilized intervention.

Answer 1

Fixed Exchange rate denotes nominal exchange rate that is set firmly by the monetary authority with respect to one foreign currency for basket of foreign currency.

While managed foreign exchange rate regime suggest that the rate between different currencies are fluctuating based upon the demand and supply to help with the price discovery.

fixed exchange rate regime is where the exchange rate are pegged against another currency and that are continuously monitored by the central government where in managed foreign exchange rate regimes there is an independent market which decides over the exchange rate through of twin factors of demand and supply

Central banks under managed foreign exchange rate regime through purchase or sale of the foreign currency without affecting the monetary base of the currency. Like Federal reserve will sell the euros if it thanks euros are getting stronger in comparison with dollars and it will help to decline the value of of Euro against dollar.