The Current Scenario of Exchange Rate Regimes

Now the IMF classifies member countries into eight categories according to the Exchange rate regime they have adopted. A brief summary of IMF’s classification is given below:

1. No Separate Legal Tender Arrangement

This group includes
a) Countries which are members of a currency union and share a common currency like the twelve members of the European Currency Union (ECU), who have adopted Euro as their common currency or
b) Countries which have adopted the currency of another country as their currency. IMF’s 1999 Annual Report on Exchange Arrangements and Exchange Restrictions indicates that 37 countries belong to this category.

2. Currency Board Arrangement

A regime under which there is a legislative commitment to exchange the domestic currency against a specific foreign currency at a fixed exchange rate coupled with restrictions on the monetary authority to ensure that this commitment will be honored. This implies constraints on the ability of the monetary authority to manipulate domestic money supply. In its classification referred to above, IMF has classified eight countries – Argentina, Bosnia, Brunei, Bulgaria, Djibouti, Estonia, Hong Kong, and Lithuania – as having a currency board system. However, Hanke (2002) argues that none of these countries can be said to conform to all the criteria of an orthodox currency board system. According to him, legislative commitment to convert home currency into a foreign currency at a fixed rate is just one of the six characteristics of an orthodox currency board arrangement.

3. Conventional Fixed Pegs Arrangement

This is identical to the Bretton Woods system where a country pegs its currency to another or to a basket of currencies with a band of variation not exceeding +1% around the central parity. The peg is adjustable at the discretion of the domestic authorities. 39 IMF members had adopted this regime as of 1999. Of these thirty had pegged their currencies to a single currency and the rest to a basket.

4. Pegged Exchange Rates within Horizontal Bands

Here there is a peg but variation is permitted within wider bands. It can be interpreted as a sort of compromise between a fixed peg in the floating exchange rate. 11 countries had adopted such wider band regimes in 1999.

5. Crawling Peg

This is another variant of limited flexibility regime. The currency is pegged to another currency or a basket, but the peg is periodically adjusted to a well specified criterion or is discretionary in response to changes in inflation rate differentials. 6 countries come under crawling peg regime in 1999.

6. Crawling Bands
The currency here is maintained within certain margins around a central parity which ‘crawls’ in a pre-announced fashion or in response to certain indicators.9 countries are having such regimes under an agreement in 1999.

7. Managed Floating with no Pre-announced Path for the Exchange Rate

Here, the central bank influences the exchange rate by means of active intervention in the foreign exchange market through buying and selling foreign currency against home currency without any commitment to maintain the rate at any particular level. 27 countries joined to this group in 1999.

8. Independently Floating

Here, the exchange rate is market determined, where the central bank intervening is only to moderate the speed of change and to prevent excessive fluctuations but not attempting to maintain the rate at any particular level. 48 countries including India joined as independent floaters in 1999.

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