Determination of Exchange Rates in Different Countries

Individual Essay

The exchange rate regime is the set of rules by which a country or set of countries organize the determination of exchange rates. There are a wide variety of exchange rate roughly corresponding to two types of regimes: the fixed exchange rate and the floating exchange rate regime (or flexible). The choice of exchange rate regime over another is within the monetary policy decided by a country or a currency area.

In a fixed exchange rate, the price of a currency is fixed relative to a standard - often a currency - by the central bank that issues the currency. And the price set is called the central parity  and is the reference exchange rate with a margin of fluctuation may be authorized (plus or minus a few percent). The monetary authorities are obliged to defend the central rate to keep within the margin of fluctuation permitted. Central rate of changes (devaluation or revaluation) may nevertheless be authorized under certain conditions.

There are many forms of fixed exchange rate regimes. A pivot exchange rate can be fixed with a margin of fluctuation permitted more or less wide. In a single currency system (as in the euro), a central bank sets fixed and irrevocable exchange rates, local currencies being replaced by a common currency. In a currency board system, in English currency board (case of the Argentine peso from 1991 to 2001), the issue of currency depends strictly reference currency amounts set aside by the central bank of that country. Sometimes the two currencies, and local reference, freely circulate within the country.

In a flexible exchange rate regime (or floating), in contrast, no commitment is made ​​regarding the exchange rate, which moves freely, depending on supply and demand in the foreign exchange market.

There are even several forms of floating exchange rate regimes, since the regime "pure" in which only defines the market balance, to managed float in which central banks intervene in a coordinated manner to inform the market rate of desired changes. This is particularly the case in China.

With the growing influence of China in international trade, controlling the exchange rate of the Chinese currency, the yuan, the People's Bank of China has become a recurring topic of discussion at the World Economic Summits. China is indeed often accused of not playing the game of floating exchange rates, like most developed countries, maintaining its undervalued currency to promote its exports. This more interventionist monetary policy elsewhere is considered a form of unfair competition by its trading partners, primarily the United States.