Exchange rate arrangements (No separate legal tender (As stated by the…
Exchange rate arrangements
No separate legal tender
As stated by the IMF, under an exchange arrangement with no separate legal tender, “the currency of another country circulates as the sole legal tender, or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union”.
Currency boards are fixed exchange rate regimes with an additional feature: the central bank has to keep large foreign exchange reserves. Specifically, the reserves have to be large enough to cover all the money in circulation and the deposits that commercial banks keep at the central bank.
Pegging national currency to a foreign one ore to a basket of currencies at a non-changing rate.
Linked to currency or a basket of currencies, can be changing by +/-2%.
A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
The exchange rate must remain in a narrow band of 2% relative to a “statistically identified trend” for at least 6 months. The annualized rate of change in the exchange must be at least 1%.
Pegged exchange rate within horizontal bands
The domestic currency is pegged to another currency or group of currencies. The exchange rate is maintained within bands that are wider than +/-1% of the established target.
Other managed arrangement
A residual category, which captures countries that cannot be placed into others. Countries in this category are typically characterized by frequent changes in policy.
Exchange rates are largely market determined without obvious policy interference. Intervention can be direct or indirect, but only serves to “moderate the rate of change and prevent undue fluctuations in the exchange rate.”
Intervention occurs only “exceptionally” with the aim being to calm markets. According to the IMF, intervention must be limited to 3 times in the previous 6 months, with each intervention lasting fewer than 3 days.