A fixed exchange rate, sometimes called a pegged exchange rate, is also referred to as the Tag of particular Rate, which is a type of exchange rate regime where a currency's value is fixed against the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.
A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable and is especially useful for small economies in which external trade forms a large part of their GDP.
It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
There are no major economic players that use a fixed exchange rate (except the countries using the euro and the Chinese yuan). The currencies of the countries that now use the euro are still existing (for old bonds). The rates of these currencies are fixed with respect to the euro and to each other. The most recent such country to discontinue their fixed exchange rate was the People's Republic of China, which did so in July 2005. However, as of September 2010, the fixed-exchange rate of the Chinese yuan has already increased 1.5% in the last 3 months.
Read more about Fixed Exchange Rate: Maintenance, Criticisms, Fixed Exchange Rate Regime Versus Capital Control, Literature
Famous quotes containing the words fixed, exchange and/or rate:
“It is the fixed that horrifies us, the fixed that assails us with the tremendous force of mindlessness. The fixed is a Mason jar, and we can’t beat it open. ...The fixed is a world without fire--dead flint, dead tinder, and nowhere a spark. It is motion without direction, force without power, the aimless procession of caterpillars round the rim of a vase, and I hate it because at any moment I myself might step to that charmed and glistening thread.”
—Annie Dillard (b. 1945)
“To coöperate in the highest as well as the lowest sense, means to get our living together. I heard it proposed lately that two young men should travel together over the world, the one without money, earning his means as he went, before the mast and behind the plow, the other carrying a bill of exchange in his pocket. It was easy to see that they could not long be companions or coöperate, since one would not operate at all. They would part at the first interesting crisis in their adventures.”
—Henry David Thoreau (1817–1862)
“Whoever thinks his friend more important than his country, I rate him nowhere.”
—Sophocles (497–406/5 B.C.)