Countries have a particular interest in the exchange rate of their currency relative to their trading partner`s currency, as it affects trade flows. If the national currency has a high value, its exports are expensive. The result is a trade deficit, a reduction in output and unemployment. If the value of the currency is low, imports may be too expensive, although exports are expected to increase. Some changes in the rate are allowed and adjusted as above. The current state of foreign exchange markets does not allow for the rigid system of fixed exchange rates. At the same time, floating exchange rates expose a country to exchange rate volatility. Hybrid exchange systems have evolved to combine the characteristics of fixed and flexible exchange rate systems. They allow exchange rates to fluctuate without fully exposing the currency to the flexibility of a dispersed property. Exchange rates are determined in the foreign exchange market, which is open to a wide range of buyers and sellers, where currency exchanges are continuous. The spot price refers to the current exchange rate.
The term exchange rate refers to an exchange rate that is now listed and traded, but for delivery and payment at a given future date. Short-term movements in a fluctuating currency reflect speculation, rumours, disasters and daily supply and demand for money. If supply exceeds demand, that currency will fall, and if demand exceeds supply, that currency will increase. One of the most important economic decisions a nation must make is how it will evaluate its currency against other currencies. An exchange rate regime is how a nation manages its currency in the foreign exchange market. An exchange rate regime is closely linked to the country`s monetary policy. There are three basic types of trading systems: floating exchange, fixed exchange, and fixed float exchange. Currency systems: The map above shows which countries have set up which exchange rate system. Dark green is for scattered property, neon green for managed float, blue is for currency and red for countries that use another country`s currency.
This classification of the exchange rate regime is based on the GGOW classification method (Ghos, Guide, Ostry and Wolf, 1995, 1997), which combined the DE jure classification of the IMF with the actual behaviour of exchange rates, in order to distinguish between official and real policy. The GGOW classification method is also called the trichotomy method. The currency is adjusted periodically in small quantities at a fixed price or in response to changes in selective quantitative indicators such as. B past inflation differentials relative to major trading partners, differences between the inflation target and expected inflation in major trading partners, etc. The crawl rate can be adjusted to establish inflation-adjusted exchange rate (retrograde) changes or a pre-announced fixed rate and/or below projected (forward-looking) inflation differentials.