The member
countries generally accept the IMF classification of exchange rate regime,
which is based on the degree of exchange rate flexibility that a particular
regime reflects. The exchange rate arrangements adopted by the developing
countries cover a broad spectrum, which are as follows:
o
Single
Currency Peg
The country pegs to a major
currency, usually the U. S. Dollar or the French franc (Ex-French colonies)
with infrequent adjustment of the parity. Many of the developing countries have
single currency pegs.
o Composite Currency Peg
A currency composite is formed by
taking into account the currencies of major trading partners. The objective is
to make the home currency more stable than if a single peg was used. Currency
weights are generally based on trade in goods – exports, imports, or total
trade. About one fourth of the developing countries have composite currency
pegs.
o
Flexible
Limited vis-Ã -vis Single Currency
The value of the home currency is
maintained within margins of the peg. Some of the Middle Eastern countries have
adopted this system.
o Adjusted to indicators
The currency is adjusted more or
less automatically to changes in selected macro-economic indicators. A common
indicator is the real effective exchange rate (REER) that reflects inflation
adjusted change in the home currency vis-Ã -vis major trading partners.
o Managed floating
The Central Bank sets the exchange
rate, but adjusts it frequently according to certain pre-determined indicators
such as the balance of payments position, foreign exchange reserves or parallel
market spreads and adjustments are not automatic.
o Independently floating
Free market forces determine
exchange rates. The system actually operates with different levels of
intervention in foreign exchange markets by the central bank. It is important
to note that these classifications do conceal several features of the
developing country exchange rate regimes.
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