key term - Managed Float

Definition

A managed float is an exchange rate regime where the value of a currency is allowed to fluctuate within a certain range, with the central bank occasionally intervening to influence the exchange rate. This approach aims to balance the benefits of a flexible exchange rate with some degree of stability and control.

5 Must Know Facts For Your Next Test

1. Managed float regimes allow for some flexibility in exchange rates, unlike fixed exchange rate systems which peg the currency to another.
2. Central banks in managed float regimes will occasionally intervene in the foreign exchange market to influence the value of the currency, aiming to maintain stability and prevent excessive volatility.
3. The degree of intervention can vary, with some managed float regimes allowing for more flexibility than others, creating a spectrum between pure floating and fixed exchange rates.
4. Managed float regimes became more common in the 1990s as countries moved away from fixed exchange rates in the wake of currency crises and the collapse of the Bretton Woods system.
5. Proponents argue that managed floats provide the benefits of flexible exchange rates, such as the ability to adjust to economic shocks, while also offering some degree of stability through central bank intervention.

Review Questions

• Explain how a managed float exchange rate regime differs from a fixed or floating exchange rate system.
  • In a managed float regime, the value of a currency is allowed to fluctuate within a certain range, unlike a fixed exchange rate system where the currency is pegged to another currency or basket of currencies. However, the central bank will occasionally intervene in the foreign exchange market to influence the exchange rate, in contrast to a pure floating exchange rate system where the currency's value is determined solely by market forces. This approach aims to balance the benefits of flexibility with some degree of stability and control over the currency's value.
• Analyze the factors that contributed to the rise of managed float exchange rate regimes in the 1990s and 2000s.
  • The move towards managed float exchange rate regimes in the 1990s and 2000s was largely driven by the collapse of the Bretton Woods system and the currency crises that affected many countries during that period. Fixed exchange rate systems were seen as increasingly untenable, as they made countries vulnerable to speculative attacks and economic shocks. Adopting a managed float allowed countries to maintain some control over their currency's value while also benefiting from the adjustability of a flexible exchange rate. This approach was viewed as a middle ground that could provide the advantages of both fixed and floating exchange rate systems.
• Evaluate the potential advantages and drawbacks of a managed float exchange rate regime in the context of current issues in international political economy.
  • A managed float exchange rate regime can offer several potential advantages in the context of contemporary international political economy. By allowing some flexibility in the currency's value, a managed float can help a country adjust to economic shocks and maintain competitiveness. At the same time, the central bank's ability to intervene can provide a degree of stability and prevent excessive volatility, which is important for trade, investment, and financial system stability. However, the effectiveness of central bank intervention is often limited, and managed floats can still be vulnerable to speculative attacks. Additionally, the degree of control over the exchange rate may conflict with other macroeconomic policy objectives, such as controlling inflation. Overall, the managed float approach represents a compromise that seeks to balance the benefits of flexibility and stability, but it also comes with inherent trade-offs that policymakers must navigate in the complex landscape of modern international political economy.

Related terms

Exchange Rate Regime: The system a country uses to manage the value of its currency in relation to other currencies.

Floating Exchange Rate:

An exchange rate system where the value of a currency is determined by the foreign exchange market based on supply and demand, without government intervention.

Fixed Exchange Rate:

An exchange rate system where the value of a currency is pegged to another currency or a basket of currencies, and the government intervenes to maintain the fixed rate.