Currency Systems

One of the most important decisions that any country can make is what type of currency or foreign exchange regime to use. In this revision video, we look at each of the main currency systems and provide an update on the choices that nations have made.

Your exam board specification will make clear which currency systems you have to cover, but here is an overall summary.

• Free floating currency
• Managed floating exchange rate
• Semi-fixed currency (crawling peg)
• Fully-fixed exchange rate (hard peg)
• Currency board system (hard peg)

Degrees of floating systems

• Floating currencies: A floating exchange rate is largely market determined, without an ascertainable or predictable path for the rate
• Free floating currencies: A floating exchange rate can be classified as free floating if intervention occurs only exceptionally and aims to address disorderly market conditions

Currency anchor (fixed or semi-fixed) system

• The monetary authority (central bank) buys or sells foreign exchange to maintain the exchange rate at its predetermined level or within a range
• Currency peg can be raised (revaluation) or reduced (devaluation)

Currency board arrangement

• A currency board is an extreme form of a pegged exchange rate, in which management of the exchange rate and the money supply are taken away from the nation's central bank
• Monetary authority decides whether to peg the exchange rate of the local currency to a foreign currency, an equal amount of which is held in reserves.
• Example to use is Hong Kong’s currency board arrangement with the US dollar
• According to the latest IMF survey, the number of countries with free-floating arrangements remained at 31 at the end of 2018. The majority of countries use either a managed floating system or prefer a semi-fixed or hard currency peg regime.

Some examples of countries and their currency regime in 2019

• Free floating currency - Australian dollar, UK sterling and the Euro
• Managed floating currency - Indian rupee and Brazilian real
• Conventional hard currency peg to US dollar - Saudi Arabian riyal
• No separate legal tender (use US $) - Ecuador
• No separate legal tender (use the Euro) - Kosovo
• Currency board arrangement with US dollar - Hong Kong
• Conventional hard currency peg to the Euro - Denmark Krone
• Currency board arrangement with the Euro - Bulgarian Lev
• Semi-fixed currency with the US dollar - Trinidad and Tobago
• Crawling pegged currency with basket of currencies - China (Yuan)
• Member of the Euro single currency bloc (floating Euro) - Finland
• Stabilised arrangement (managed float v basket of currencies) - Singapore