|
Basis |
Fixed (Pegged) Exchange rate |
Flexible Exchange rate |
|
Meaning |
Fixed exchange rate refers to a rate which the government
sets and maintains at the same level |
Flexible exchange rate is a rate that variate
according to the market forces. |
|
Determined by |
Government or central bank |
Demand and Supply forces |
|
Changes in currency price |
Devaluation and Revaluation |
Depreciation and Appreciation |
|
Speculation |
Takes place when there is rumor about change in government
policy |
Very common |
|
Self-adjusting mechanism |
Operates through variation in supply of money,
domestic interest rate and price |
Operates to remove external instability by change
in forex rate. |
|
Need for maintaining foreign reserve |
Foreign reserves need to be maintained |
No need for maintaining foreign reserve |
|
Impact on BOP |
Can cause deficit in BOP that cannot be adjusted |
Deficit or surplus in BOP is automatically corrected. |