Subject: Outlining the different currency exchange rate systems used in the global financial system today.
Objective: Determine which currency exchange rate system is currently used by specific countries of interest.
Quiz Question: Which Exchange Rate Type (numbered list above) and Policy Arrangement (lettered list above) are being used by the following countries?
- Iraq
- Vietnam
- Kuwait
- China
- Russia
- USA
- European Union
- Saudi Arabia
Currency Exchange Classifications (Types) Explained
Learning about the different exchange rate systems is vitally useful as a foundation for understanding what lies ahead when the current fiat currency debt system reaches its logical conclusion and a global currency reset (GCR) begins unfolding.
The international currency exchange classification system looks at how countries handle their currency and exchange rates.
It sorts them based on how flexible their approach is and whether they have formal or informal commitments to certain exchange rate paths.
The goal here is to understand how the choice of handling currency impacts a country’s ability to make independent decisions about its economic policies.
These classifications help explain how countries handle their currency, whether they tie it to another currency, let it float in the market, or have specific targets like controlling inflation.
There are four exchange rate types, and different arrangements for each type. Each approach has its pros and cons, impacting a country’s economic stability and flexibility which I explain below.
1. Currency Hard Pegs
1A) Exchange Arrangement with No Separate Legal Tender
- A country adopts and uses a different currency (like the US dollar) for all transactions. It means the country gives up control over its own money and policy decisions.
1B) Currency Board Arrangement
- A country committing to exchanging its currency for a specific foreign currency at a fixed rate. The catch is, it must keep enough foreign currency in reserve to support this, limiting its ability to control its money supply.
2. Currency Soft Pegs
2A) Conventional Pegged Arrangement
- A country officially fixing its currency’s value to another currency or a basket of currencies. The country is ready to intervene to maintain this fixed value, using various methods like buying or selling foreign exchange.
2B) Stabilized Arrangement
- A country where its currency’s exchange rate stays within a small margin for at least six months. This stability is achieved through official actions, but it doesn’t necessarily mean a long-term commitment.
2C) Crawling Peg Arrangement
- A country adjusting its currency slightly either regularly or in response to specific indicators, like inflation rates. The rules for this adjustment are public or shared with organizations like the IMF.
2D) Crawl-like Arrangement
- This is similar to a crawling peg, but the exchange rate must stay within a narrow range for at least six months, and the arrangement must not be considered floating.
2E) Pegged Exchange Rate within Horizontal Bands
- A country keeping its currency’s value within certain fluctuation margins around a fixed central rate. This can include countries in the European Monetary System.
3. Floating Currencies
3A) Floating Arrangement
- A country where the exchange rate is mainly determined by market forces, and there’s no set or predictable path for the rate. Authorities might intervene occasionally to prevent extreme fluctuations.
3B) Free Floating Arrangement
- A floating exchange rate is considered free-floating if government intervention is rare and aimed at addressing disorderly market conditions. Authorities should provide evidence of limited intervention.
4. Residual Currencies
4A) Other Managed Arrangement
- This category is a catch-all for arrangements that don’t fit neatly into the other classifications. It includes situations where policies frequently change, and the exchange rate arrangement is not clearly defined.
Quiz Question Answers: Which Exchange Rate Type (numbered list above) and Policy Arrangement (lettered list above) are being used by the following countries?
- Iraq – 2B) Soft Peg – Stabilized Arrangement pegged to US Dollar
- Vietnam – 2D) Soft Peg – Crawl-like Arrangement pegged to a currency basket
- Kuwait – 4A) Residual – Managed Arrangement (pegged to undisclosed currency basket)
- China – 2D) Soft Peg – Crawl-like Arrangement (managed against currency basket)
- Russia – 3B) Free Floating Arrangement
- USA – 3B) Free Floating Arrangement
- European Union – 3B) Free Floating Arrangement
- Saudi Arabia – 2A) Soft Peg – Conventional Arrangement pegged to US Dollar
