Exchange Rate Agreements

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Exchange Rate Agreements

A monetary authority can allow, for example. B, that the exchange rate fluctuates freely between an upper and lower limit, a price cap and a “soil.” The country links its currency (formally or de facto) to another currency or basket of currencies at a fixed rate, the basket being made up of the currencies of the main trading or financial partners and the weightings reflecting the geographical distribution of trade, services or capital flows. Monetary composites can also be standardized, as in the case of SDRs. There is no obligation to maintain irrevocable parity. The exchange rate can vary from a pivotal rate in narrow margins of less than ±1% – or the maximum and minimum value of the exchange rate can remain within a narrow range of 2 per cent – for at least three months. The monetary authority is willing to maintain fixed parity through direct intervention (i.e. by selling/buying foreign currency on the market) or by indirect intervention (e.g. B, the aggressive application of interest rate policy, the imposition of exchange rate rules, the exercise of moral suaction limiting foreign exchange activity or the intervention of other public institutions). Although monetary policy flexibility is limited, it is greater than in the case of separate no-legal exchange agreements and monetary authorities, since the traditional functions of the central bank are still possible and the monetary authority can adjust the level of the exchange rate, albeit relatively rarely. This classification system is based on effective, de facto agreements made by IMF staff by IMF members, which may deviate from their officially announced agreements. The regime classifies exchange agreements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate trajectories. It distinguishes between different forms of exchange rate regimes and agreements without a separate legal tender, in order to assess the impact of the choice of exchange rate regime on the degree of independence of monetary policy. The system presents members` exchange systems against alternative monetary policy frameworks, in order to use these two criteria to increase the transparency of the classification system and to show that different exchange rate systems can be compatible with similar monetary policy frameworks.

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