Managed float exchange rates

Managed float exchange rates


In this video we’ll examine managed float
exchange rates and see how they are managed. You should have a basic understanding of exchange
rates and understand how they are determined. A managed float combines part of the freely
floating exchange rate mechanism with the fixed exchange rate regime. It looks a bit scary when we consider the
diagram but we’ll go through that step by step. As mentioned in the previous video, China
no longer operates a fixed exchange rate system. It is currently operating a managed float
exchange rate. The government permits fluctuations of 2%
from a fixed rate but will intervene at fluctuations beyond this. If the currency appreciates or depreciates
more than 2%, the Chinese government will take action to bring it back within this range. In the diagram we see two purple lines which
represent the range between which the exchange rate can fluctuate, including an upper limit
and lower limit. I’ll use the same diagram as I did before
in the video on the fixed exchange rate to demonstrate how the government may intervene
to adjust the value of the currency. If there is an increase in the demand for
yuan the currency will appreciate against the dollar. Should this value exceed the upper limit set
in this managed float, the government will intervene, perhaps by increasing the supply
of yuan in the foreign exchange market and driving down the value of the Chinese currency
and returning it to a level acceptable within the upper and lower limits. When considering the diagram for this exchange
rate system it is important to be able to graph it as well as understand the logic behind
it. If there is a fluctuation in the exchange
rate beyond a certain point, the government will take action to return it to a value within
the pre-determined range. Now let’s take a look at a past CIE multiple
choice question. This question comes from winter 2002, paper
2. Which of the following combinations of changes
indicates that a country is operating a managed float? The best choice here will be the option that
reflects a change in the nominal exchange rate matched by an action to offset the change. Let’s make up an example. If J-bucks depreciate against the US dollar
by 20% and the government wants to prop up the J-buck, they will flood the foreign exchange
market with $1 billion taken from the currency reserves. They can use these dollars to buy J-bucks,
thereby increasing the demand for it and cause the J-buck to appreciate. Our correct answer here is A. That wraps up this video on managed float
exchange rates. Once again, I hope you’ve found this video
helpful and if you have any questions or comments, do leave them below, email me at [email protected]
or tweet me @enhancetuition. For now that’s us done and I will see you
in the next one!

2 Comments

  • Trevish

    May 18, 2017

    Hey you should use studentroom.co.uk to invite students to check your videos, especially they are in exam period in UK

    Reply
  • Anirosh Shrestha

    May 4, 2019

    Is managed exchange rate system and pegged exchange rate system same?

    Reply

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