Key Diagrams - Managed Floating Exchange Rates

In this revision video we look at how supply and demand diagrams can be used to analyse a managed floating currency.

A managed floating exchange rate is an exchange rate system that allows a nation's central bank to intervene regularly in foreign exchange markets to change the direction of the currency's float and/or reduce the amount of currency volatility.

This exchange rate system is also known as a “dirty float”.

IMF Survey of Currency Systems (2021)

Countries with a managed-floating exchange rate:

• Brazil
• South Korea
• Chile
• South Africa
• Turkey
• New Zealand

Key central bank tools for managing a floating exchange rate are:

1. Changes in monetary policy interest rates– designed to influence “hot money” flows
2. Direct intervention in the currency marketa)Buying domestic currency for an appreciationb)Selling domestic currency for a depreciation