11.2.2—Fixed/managed exchange rates

Under a fixed exchange-rate system the authorities maintain the currency near a chosen parity, while a managed system allows limited movement but intervenes when the rate approaches a target or band.

Defending the rate may require foreign reserves, interest-rate changes, capital controls or fiscal adjustment. Persistent pressure can force a devaluation, revaluation or abandonment of the regime.

If demand for a currency falls below the peg, the central bank can buy it with reserves. If reserves become scarce, the peg may be unsustainable without changing policy or the parity.

A fixed rate does not eliminate market pressure; it transfers adjustment to reserves, interest rates, output or the official parity.