Fixed exchange rate

A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency (most often the US dollar), to a basket of other currencies, or to another measure of value, such as gold. As the reference value rises and falls, so does the currency pegged to it. A currency that uses a fixed exchange rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange rate.

Related Topics:
Exchange rate regime - Currency - US dollar - Gold - Fixed currency - Floating exchange rate

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Economists generally think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates because floating rates are responsive to the foreign exchange market. However, in certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was ameliorated by the fixed exchange rate of the Chinese renminbi, and the IMF and the World Bank now acknowledge that Malaysia's adoption of a peg to the US dollar in the aftermath of the same crisis was highly successful.

Related Topics:
Economist - Foreign exchange market - Asian financial crisis - Chinese - Renminbi - IMF - World Bank - Malaysia

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Countries adopting a fixed exchange rate must exercise careful and strict adherence to policy imperatives, and keep a degree of confidence of the capital markets in the management of such a regime, or otherwise the peg can fail. Such was the case of Argentina, where unchecked state spending and international economic shocks disbalanced the system and ended up forcing an extremely damaging devaluation (see Argentine Currency Board and Argentine economic crisis).

Related Topics:
Capital markets - Argentina - Devaluation - Argentine Currency Board - Argentine economic crisis

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