managed floating exchange rate

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The system under which a country's exchange rate is not pegged, but the monetary authorities try to manage it rather than simply leaving it to be set by the market. This can be done in two ways. Firstly, small fluctuations in the exchange rate can be smoothed out by the authorities buying the country's currency when its price would otherwise fall and selling it when its price would otherwise rise. Secondly, the authorities can also influence the exchange rate through their macroeconomic policies. Higher interest rates tend to bring inward capital flows and improve the trade balance through their effect in depressing domestic activity; lower interest rates have the opposite effects. This type of exchange rate management is sometimes referred to as ‘dirty floating’.

Subjects: Economics.

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