Exchange Rate System Throughout History
Exchange rate systems throughout history
Exchange rate systems throughout history.
The early exchange rate was that of the gold standard, where a country note currency value was linked to that of a certain amount of gold. On these standards, a state sets a price for which it buys and sells gold. The Jamaica agreement was adopted in 1976 led to the abandonment of the gold standard moving the world to pegged foreign exchange rate system, where currencies compare to other currencies in the global market. The result was the following three types of exchange rate regimes. Floating/fluctuating exchange rate is a regime allowing a value of a currency to vary freely following change in other currencies in the exchange market. For fixed or pegged exchange rate system, governments attempt to keep up their money esteem steady against a particular currency or commodity. Pegged gliding monetary standards are pegged to some band or quality, either altered or occasionally balanced. These are a mixture of settled and drifting regimes.Soft pegged exchange regimes suffer from world’s economic crisis. Following the crisis-hit period 1991-99, most countries have moved from the soft pegs and preferring a constant specific range for their currency. For a country open to the international capital flow, having both floating and fixed rates is not viable since the policies are directed to domestic goals conflicting the capital flow. As a useful measure to addressing the disequilibrium by policymakers, interest rates may not be effective in addressing a massive imbalance. Despite the capital controls losing their effectiveness over time, a country can rely on them to sustain a floating exchange rate regime. Inflationary history and the characteristics of an economy dictate her choice of the forex system. Persistence in the move from hard to soft pegs in the medium term is expected. However, the trend may change in the long-term depending on how well the dollarized countries and the Euro era operate.