“Managed floating exchange rate”

definition

A managed floating exchange rate is a regime that allows an issuing central bank to intervene regularly in FX markets in order to change the direction of the currency’s float and shore up its balance of payments in excessively volatile periods. This regime is also known as a “dirty float”.

Until the 1980s, the vast majority of the world currencies were subject to some form of control, but with the advent of free trade and globalisation in the 1990s, most developed economies gradually removed those checks, letting their currency’s exchange rate fluctuate according to supply and demand.

Free-floating regimes, however, present some disadvantages, the most obvious of which is the impact of sharp fluctuations on the country’s economy through the trade balance. Currency appreciation increases the prices of the country’s exports, while currency depreciation might pose problems for imports of essential products such as energy and food.

Central banks and governments have a broad range of tools to “manage” exchange rates, from the subtlest monetary policies to straightforward intervention in currency markets.

In that sense, most of the world’s currencies are “managed” to a certain degree, including the most traded ones. Officially, though, the International Monetary Fund recognised 82 nations – 43% of all countries –  as using a managed floating exchange rate in its 2014 report.

These actions mostly aim to mitigate sharp variations in the exchange rate and to avoid major disruptions in the country’s foreign trade and cross-border payments.

 


 

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