Difference between Fixed Exchange Rate and Flexible Exchange Rate

Difference between Fixed Exchange Rate and Flexible Exchange Rate

Exchange rate system alludes to a group of international rules that deals with the changes in exchange rate in addition with foreign exchange market. There are two types of foreign exchange market that are going to discuss in this article. Its two types are Fixed Exchange Rate and Flexible Exchange Rate.

Fixed Exchange Rate

Fixed exchange rate, as also known as  pegged exchange rate, is a kind of exchange rate system where value of currency is fixed alongside either the estimation of other single currency, to a wicker bin of different currencies, or with other measure of significant worth, for example, gold.

 Flexible Exchange Rate

A flexible exchange rate or floating exchange rate is actually a kind of where value of coin is permitted to change in light of mechanism of foreign exchange market. A currency which utilizes the flexible exchange rate is called floating or flexible currency.

Fixed Exchange Rate VS Flexible Exchange Rate

In this article we are going to discuss the differences that exist between the two types of exchange rate as that will help you to get a clear picture about these exchange rates.

• Refers:

Fixed exchange rate alludes to rate which sets by the government and keeps up at the same level.

Flexible exchange rate alludes to rate that changes as indicated by the changes in market forces.

• Decided by:

Fixed exchange rate mostly decided by the central bank of country or government of state.

Forces of demand and supply usually decide the flexible or floating exchange rate.

• Fixed:

Fixed exchange rate is actually the rate that is formally fixed regarding gold or some currency through the government. If the supply and demand of foreign currency changes, fixed exchange rate does not changes.

Flexible exchange rate is actually the rate which is formally not fixed regarding any currency or gold as it changes when demand and supply related to foreign currency changes.

• Changes:

In fixed exchange rate system, when the currency price increases, it is called revaluation and when currency price decreases, that is called devaluation.

In flexible exchange rate system, when currency price increases, it is known as appreciation and when currency price declines, it is called as depreciation.

• Speculation:

In fixed exchange rate, speculation mostly done at the time when there are chances of changes in government policies.

In flexible exchange rate, speculation is very normal process and done at the most of time.

• Mechanism:

In fixed exchange rate system, self adjusting mechanism functions through changes in money supply, price and domestic interest rate.

In flexible exchange rate system, self adjusting mechanism works to evacuate external instability with the help of variation in forex rate.

• Government intervention:

In fixed exchange rate, government intervention is there at the high rate.

In flexible exchange rate, no government intervention is there.

Conclusion

Many economists are usually in favor of flexible exchange rate because of their dependence on the free market framework, strategy makers, price mechanism and central bankers are in favor of fixed exchange rate.