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An Exchange Rate Regime is policy towards an exchange rate. 

Exchange rates are the prices at which currencies trade.

Governments 🏛:

  • maintain a certain regime to make sure that their currency doesn't fluctuate as often with the business cycle
  • maintain good net exports to make a positive impact on aggregate output & price level. 

So what are the 2 exchange rate regimes? Well...


The Fixed Exchange Rate
💲

  • the government maintains the exchange rate against another currency or commodity
  • Hong Kong utilizes this regime
  • typically, countries peg their exchange rates to the U.S. dollar or trading partners

The Floating Exchange Rate 📈

  • the government lets the exchange rate go wherever the market takes it
  • Britain & Canada utilize this regime
  • this regime is controlled by demand & supply of a certain currency leading to depreciating and appreciating currency (it's a fun cycle😄)

Disclaimer: There is also a third regime, which is just a hybrid of the two regimes above. The U.S. uses this hybrid regime. 

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