managed floating exchange rate
A managed floating exchange rate (also known as dirty float’) is an exchange rate regime in which the exchange rate is neither entirely free (or floating) nor fixed. Rather, the value of the currency is kept in a range against another currency (or against a basket of currencies) by central bank intervention. By far the most significant system of managed floating exchange rate in recent years is the Chinese currency regime.
At the start of each trading day, China’s central bank sets a ‘reference rate’ against which the renminbi is allowed to rise or fall no more than 2 per cent against USD in onshore trading. A managed floating exchange rate gives the central the power to set a corridor for the exchange rate, in order to avoid situations of currency over- or under-valuation.
In order to be credible, a managed floating exchange rate has to be managed by an autonomous or semi-autonomous central bank with a high level of FX reserves, strong credibility. Above all, the target corridor for the exchange rate should not be too far away from market-based levels.