Exchange Rate Arrangements and International Monetary Systems

The exchange rate can be totally flexible or completely free to float on the foreign exchange market on the one hand, and fixed or pegged to one of the major currencies or a basket of currencies on the other hand. Between these two extremes, there can be a few types of exchange rate arrangements and combinations. Prior to 2009, the IMF classified the prevailing exchange rate regimes into eight categories. They were: exchange arrangements with no separate legal tender, currency board arrangements, conventional fixed peg arrangements, pegged exchange rates within horizontal bands, crawling pegs, exchange rates within crawling bands, managed floating with no predetermined path for the exchange rate, and independent floating. Since then, the IMF has adopted the methodology that classifies exchange rate arrangements into four types and ten categories (cf. Habermeier et al. 2009). The four types are hard pegs, soft pegs, floating regimes (market-determined rates) and residual. There are two categories in the first type: exchange arrangement with no separate legal tender and currency board arrangement. Five categories are found in the second type: conventional pegged arrangement, pegged exchange rate within horizontal bands, stabilized arrangement, crawling peg and crawl-like arrangement. Two categories are in the third type: floating and free floating. The last type has one category: other managed arrangement.