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:
“The whole point about the true unconscious is that it is all the time moving forward, beyond the range of its own fixed laws or habits. It is no good trying to superimpose an ideal nature upon the unconscious.”
—D.H. (David Herbert)
“So long as the system of competition in the production and exchange of the means of life goes on, the degradation of the arts will go on; and if that system is to last for ever, then art is doomed, and will surely die; that is to say, civilization will die.”
—William Morris (1834–1896)
“Strange that the vanity which accompanies beauty—excusable, perhaps, when there is such great beauty, or at any rate understandable—should persist after the beauty was gone.”
—Mary A. [Elizabeth, Countess Von] Arnim (1866–1941)