4.5.5—Managed exchange rates
- Syllabus
- First assessment 2022
- Objective
- 4.5.5
- Level
- SL
A managed rate combines a market with intervention
A managed exchange rate normally moves with demand and supply, but the central bank intervenes to smooth volatility or influence a preferred range. It can use reserves, interest rates or communication, depending on the policy objective.
Management may reduce abrupt shocks without committing to a permanent peg, yet intervention can be costly and difficult to time. Always state whether the bank is defending a level, smoothing a movement or pursuing another goal.
An overvalued managed currency is held above its market-clearing value, producing excess supply and downward pressure; an undervalued currency is held below equilibrium, producing excess demand and upward pressure. Show the managed target or band against the demand-supply equilibrium, then identify purchases or sales of domestic currency, reserve changes or interest-rate action. Overvaluation can make imports cheaper but exports less competitive; undervaluation can support net exports but raise import prices and foreign-policy tensions.