Question

In determining the exchange rate of the country’s currency dominated by markets or by official action, there are four categories: Soft pegs, hard pegs, residual, floating arrangements. Please describe the categories in short

Answer 1

Soft peg – In this method of deterring the exchange rate the currency keeps its value stable against a reserve currency (it can also be a basket of currencies). In this method the government and the central bank of the country has limited degree of monetary policy flexibility.

Hard peg – In this method a fixed exchange rate between one national currency and another national currency is established. In this method the first currency is usually that of a small country while the second currency is that of a country which has a developed and industrial based economy.

Residual arrangements – This is the arrangement that is not classified as floating, soft pegs and hard pegs. The residual arrangements consist of other managed arrangements. Arrangements that are characterized by frequent shifts in policies fall in this category.

Floating arrangements – This is largely market determined and hence there is no ascertainable or predictable path for the rate. In this arrangement foreign exchange market intervention can be direct or indirect and is used to moderate the rate of change.