Fixed vs Flexible Exchange Rate Regime

CFA Level II Economics
#1

Hi all,

Can I summarize my understanding as follow:-

  • Under _ flexible _ exchange rate, expansionary/restrictive monetary (or fiscal) policy will cause the exchange rate to fluctuate.
  • Under _ fixed _ exchange rate, expansionary/restrictive monetary (or fiscal) policy will cause the exchange rate to fluctuate; but under regime, government will intervene via open market transaction - buy/sell bonds.

Thank you.

Cheers,

Ernest

#2

Under a fixed regime, the currency is pegged to another currency for a specified rate determined by the central bank, and any deficits or surpluses on the balance of payments is handled through the foreign reserves.