Fixed exchange rate, alternatively called pegged interest rate, is a sort of exchange rate, which enables the government to maintain a low inflation, so that traders express their interest on investment.
Government or central bank normally associate their official exchange rate to the currency of another country. The other objective of upholding fixed exchange rate is to maintain the value of currency within a narrow limit, so that importers and exporters express their interest in investment.
Meaning of fixed exchange rate
Normally each nation try to establish a systematic plan for maintaining its currency at or near the fixed rate. The word that express opposing concepts is floating exchange rate, which is a systematic plan of a country where the currency is established by the foreign exchange market.
So, it can be said, that unlike fixed exchange rate, the floating exchange rate varies freely and are regulated by trading in the foreign exchange market.
Alternative definition of fixed exchange rate A fixed exchange rate can alternatively defined as the price of the currency which is equated to the value of other single currency(s) or to a measure of value, like gold. The currency which employs the fixed exchange rate is known as a fixed currency.
Trade-off between fixed exchange rate and floating exchange rate Some of the economists prefers to use floating exchange rate instead of fixed exchange rate as because floating exchange rates are more responsive in the foreign exchange market.
In certain situations, economists prefer to use fixed exchange rate instead of floating exchange rate, as fixed exchange rate establish more market stability.
Advice by economists The country which takes on the policy of maintaining fixed exchange rate should carefully practice the policy.
Fixed exchange rate policy Any government upholds the fixed exchange rate by purchasing or by selling its own currency on open market and for this reason, government sustains reserves of foreign currencies. In the event if the exchange rate blows too far below the expected rate, the government normally purchases its own currency by its reserves.