Exchange Rate Regimes

ok boys and girls, today i am going to copy and paste from a book "primer of foreign exchange" this is super boring and super dry, you can read if you cant sleep at night. why do we need to know all these? acturally we dont need to know about all these, these are just some information from history that i write in my blog so that i can refer to next time if i need. i always thought there is only floating or fixed, i do come across other like crawling by other economist but i dunno there are so many around.

Exchange Rate Regimes
Global trading require an effective international monetary system. A good monetary system will facilitate international trade among nations. There are a number of exchange rate regimes in which different foreign exchange rates are determined and how goverments can affect exchange rates.

Currency regimes around the world differ and do not follow a fixed pattern. These are some typical currency regimes as defined by IMF.

Exchange agreements with no separate legal tender
The currency of another country circulate as the sole legal tender. in such regimes the country may belong to a monetary or currency union in which the same legal tender is shared by the other members of the union.
examples are east timor, euro zone, cameroon and senegal.

Currency board arrangements
A monetary regime based on a legal commitment to exchange domestic currency for a specific foreign currency at a fixed exchange rate.
examples are hong kong and brunei

Fixed peg arrangement (different exchange rate margins)
the country pegs its currency at a fiexed rate to major currency, or a basket of curriencies, allowing the exchange rate to fluctuate within different margins around a central rate.
example are UAE, fiji,latvia,denmark and cyprus


crawling pegs
the currency is adjusted periodically in small amounts at a fixed preannounced rate or in response to changes in selective quantiative indicators
examples are bolivia, tunisia and nicaragua

managed floats with no preannounced path for the exchange rate
the monetary authority influences the movements of the exchange rate through active intervention in the foreign exchange market without specifying or committing to a preannounced path for the exchange rate
examples are india, indonesia, thailand, pakistan, argentina and czech

independent floating
the exchange rate is market determined, with any foreign exhcnage intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate rather than at establishing a level for it.
examples are brazil, canada, philippines, UK, US, japan.



The European Union
On January 1 1999, the euro became the only legal tender for EU members in the eurozone. TO ensure the stability of the new cuyrrency system, the participating countries had to adhere to a set of criteria. These are the Maastricht Criteria, named after the city where they were negotiated, Maastricht in the Netherlands.



The Maastricht Treaty

Inflation
cannot be higher than 1.5% above the average inflation rate of the 3 EU countries with the lowest individual inflation rates.

Long term interest rates
cannot be higher than 2% above the interest rates of the 3 countries with the lowest individual interest rates

debt/GDP ratio
a country debt cannot be greter than 6% of gross demestic product (GDP). the budgetary deficit must either be lower than 3% of national income, or be falling and almost have reached 3%, or be of a transitory nature. the deficit must also be lower than 60% of national income, or be galling at a sufficient rate towards the 60% mark.

exchange rates
the exchange rates of the national currency must have stayed within the normal boundaries of the exchange rate of the EU countries, also called the european monetary system (EMS) for 2 years. the country must have been a member of EMS for the same period