Exchange Rate Classifications

Following are the different types of possible exchange rate regimes and how
they work:

- Single Currency Peg: the country pegs to a major currency -- usually
the U.S. dollar or the French franc -- with infrequent adjustment of
the parity;
- Composite Currency Peg: the country pegs to a basket of currencies
of major trading partners to make the pegged currency more stable
than if a single currency peg were used. The weights assigned to the
currencies in the basket may reflect the geographical distribution of
trade, services, or capital flows. They may also be standardized, as
in the Special Drawing Right (SDR) and the European Currency Unit
(ECU);
- Limited Flexibility vis-a-vis a Single Currency: the value of the
currency is maintained within certain margins of the peg;
- Limited Flexibility Through Cooperative Agreements: this applies to
countries in the exchange rate mechanism of the European Monetary
System and is a cross between a peg of individual EMS currencies to
each other and a float of all these currencies jointly vis-a-vis
non-EMS currencies;
- Greater Flexibility Through Adjustment to an Indicator: the currency
is adjusted more or less automatically to changes in selected
indicators. A common indicator is the real effective exchange rate,
which reflects inflation-adjusted changes in the currency vis-a-vis
major trading partners;
- Greater Flexibility Through Managed Float: the central bank sets the
rate but varies it frequently. Indicators for adjusting the rate
include, for example, the balance of payments position, reserves, and
parallel market developments. Adjustments are not automatic;
- Full Flexibility Through an Independent Float: rates are determined
by market forces. Some industrial countries have floats -- except
for the EMS countries -- but the number of developing countries in
this category has been increasing.