Question

What are the different types of currency regimes that governments around the world use? What do you think is the most ideal one and why? (about 250 words)

Answer 1

Exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency. Countries use different currency or exchang rate regimes to control their currency with others. It is very important to exchange the currency in the international trade. So there is a need of some regimes for this currency exchange.

DIFFERENT KINDS OF CURRENCY REGIMES

1. Floating exchange rate regime - A floating exchange rate regime also known as flexible exchange rate regime is that which a country's exchange rate fluctuates in a wider range and the country's monetary authority makes no attempt to fix it against any base currency. This fluctuation may be in upward or downward direction.

2. Intermediate rate regime - These kind of regime is always between the fixed and floating regimes. Here there will be some fluctuations and some times the exchange rate may be fixed. The floating will not be go to the edges. It will be a slight changes. Here there is only a tiny variation around the fixed exchange rate against another currency. This is how its works.

3. Fixed exchange rate regime - A fixed exchange rate regime known as pegged exchange rate regime pegs its currency's exchange rate to another currency .Here we can see a narrow fluctuation in the pegged currency. To maintain the exchange rate within that range, a country's monetary authority usually needs to intervenes in the foreign exchange market.

Actually we can not say which one is the best method or regime in currency exchange. We can consider intermediate rate regime because it has the features of the both other regimes. we adopt a fixed exchange rate system if a=the central bank can not maintain prudent monetary policy, leading to a reasonably low inflation rate.If this situation occurs then they will go for fixed rate regimes. But if the central bank is capable for maintaing the monetary policy and if they are able to control the inflation then they can choose floating exchange rate regimes. So here we can see these methods are used in different circumstances and will be bet in these circumstances.

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