Classification of Exchange Rate Regimes

The exchange rate is the price of one currency in terms of another currency. Consider the currency used in your country and calculate how many units of your country’s currency you would need to buy one United States (US) dollar, or how many US dollars you would need to buy one unit of your domestic currency. This is the nominal exchange rate. A country may choose whether the exchange rate of its currency will be determined in the market, i.e., without a Central Bank’s intervention in the foreign exchange (FOREX) market, or whether to manage the exchange rate by intervening in the FOREX
market, thereby affecting supply and demand for domestic currency. Countries’ authorities, usually central banks (CBs), adopt certain exchange rate regimes, which define how the exchange rates of their domestic currencies will be determined. The video will walk through the classification of exchange rate regimes: hard exchange rate pegs, soft exchange rate pegs, and flexible exchange rate regimes.