Exchange Rate Policy
What is an Exchange Rate Policy?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is an Exchange Rate Policy?
Exchange rate policies come in a range of different forms. Let the foreign exchange market determine the exchange rate; let the market set the value of the exchange rate most of the time, but have the central bank sometimes intervene to prevent fluctuations that seem too large; have the central bank guarantee a specific exchange rate; or share a currency with other countries. Let’s discuss each type of exchange rate policy and its tradeoffs.
A nation may adopt one of a variety of exchange rate regimes, from floating rates in which the foreign exchange market determines the rates to pegged rates where governments intervene to manage the exchange rate's value, to a common currency where the nation adopts another country or group of countries' currency.
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