TODAY’S HYBRID SYSTEM
Unlike the .earlier uniform system under either the ,gold standard or Bretton Woods, today’s exchange rate system fits into no tidy mold. Without anyone’s having planned it, the world has moved to a hybrid exchange-rate system. The major features are as follows:
A few countries allow their currencies to float .freely. In this approach, a country allows markets to determine jts currency’s value and it rarely intervenes. The United States has fit this pattern for most of the last two decades. While the Euro is just an infant as a common currency, Europe appears to be leaning toward the freely floating group.
Some major countries have managed but flexible exchange rates. Today, this group includes Canada, Japan, and many developing countries. Under this system, a country will buy or sell its cuff to reduce the day-to-day volatility of currercy fluctuations. In addition, a country will sometimes engage in systematic intervention to move its currency toward what it believes to be a more appropriate level:
• Many countries, particularly small ones, peg their currencies to ‘a major currency or to a “basket” of currencies in a fixed exchange rate. Sometimes, . the peg is all wed to glide smoothly upward or downward in a system known as a gliding or crawling peg. A few countries have the hard fix of a currency board.
• In addition, almost all countries tend to intervene either when markets become “disorderly” or when exchange rates seem far out of line w~th the “fundamentals” -that is, when they are inappropriate for existing price levels and trade flows.
A freely flexible exchange rate is one determined purely by supply and demand without any government intervention. Affixed-exchange-rate Systems one where governments state official exchange rates, which they defend through intervention and monetary policies: system is a hybrid of fixed and flexible rates in which governments attempt to affect their exchange rates directly by buying or selling foreign currencies or indirtctly, through monetary policy,by raising or lowering interest rates.