Question

Exchange Regimes

Please describe the major currency exchange regimes in the world,

and raise examples of countries that use certain regime for their currencies.

Answer 1

Exchange Rate Regimes for Major Currencies:

Over the past two decades, exchange rates among the major currencies—the U.S. dollar, the Japanese yen, and the Deutsche mark with its partner currencies in the exchange rate mechanism of the European Monetary System, before the introduction of the euro in January 1999—and the currencies of other large industrial countries currencies have exhibited substantial short-term volatility, in nominal as well as real terms and also significant medium-term mis-alignments:

volatility has been considerably higher than it was under the Bretton Woods system prevailing from 1945 to 1971;
medium-term swings have been quite large, including the 1980–85 appreciation of the dollar and the 1990–95 appreciation of the yen, and their subsequent depreciation; these wide swings in exchange rates have entailed mis-alignments relative to economic fundamentals, giving rise to questions of whether and how they can be avoided, or at least moderated.
Views on whether, how, and to what extent it might be desirable to attempt to stabilize the exchange rates of major industrial countries differ widely. They range from advocacy of pure floating, a view espoused especially by those who believe that exchange rates always reflect fundamentals and that governments and central banks do not possess knowledge superior to that of the market in such matters, to proposals for the introduction of a single world currency. Intermediate proposals include target zones, a quasi-fixed exchange rate regime among the major currencies to be achieved by monetary policy rules aimed at the exchange rate, and various schemes for policy coordination that would take the exchange rate into account.

There are two basic objections under current circumstances to any scheme that would attempt to achieve substantial fixity of exchange rates among the euro, yen, and dollar:

the first is that it would require largely devoting monetary policy to the requirements of exchange rate stability, which is likely to conflict with domestic objectives, including the objective of reasonable price stability. Indeed, the fact that movements of exchange rates among the major currencies have, on many occasions, reflected divergences in cyclical positions among the countries concerned and in the stances of monetary policy needed to achieve price stability and to support growth indicates that this concern is warranted;
second, the three major-currency areas do not conform to the usual criteria for an optimum currency area. The past decade has highlighted their lack of synchronization in economic activity and there is no reason to believe that differences across them would not continue to prevail in the future. In the absence of the type of political commitment that accompanied the euro's introduction, any attempt at fixing the exchange rates of the triplet could lack credibility and be rapidly undone by the market.
Nevertheless, a case can be made for monitoring potential major mis-alignments within the IMF's surveillance process and for occasional corrective measures.