Floating exchange rate system

Floating exchange rate system

Floating exchange rate refers to that under the paper currency system, the value of a country's currency to foreign currency is allowed to rise and fall freely according to the supply and demand situation in the foreign exchange market, and the fluctuation range of the exchange rate is not fixed. The current international exchange rate system is floating exchange rate system.

An exchange rate that rises and falls freely according to market supply and demand and is not interfered by monetary authorities. Under the floating exchange rate, gold parity has lost its practical significance, and the official exchange rate only serves as a reference. As far as the form of floating is concerned, if the government does not intervene in the fluctuation of exchange rate and completely allows the relationship between supply and demand to determine the exchange rate, it is called free floating or clean floating.

However, in order to maintain the stability of the exchange rate, or for some political and economic purposes, the governments of all countries take more or less intervention measures to the fluctuation of exchange rate. This kind of floating exchange rate is generally called management floating or dirty floating in the world. After the collapse of the fixed exchange rate system in 1973, the floating exchange rate system has been widely implemented in western countries.

On July 21, 2005, the people's Bank of China announced that China has begun to implement a managed floating exchange rate system based on market supply and demand, with reference to a basket of currencies and allowing the RMB to appreciate by 2% against the US dollar. The decision of the people's Bank of China marks that China's exchange rate system reform and economic growth strategy adjustment are entering a new stage. Floating exchange rate system refers to a kind of exchange rate system in which the monetary authority of a country no longer stipulates the price comparison between domestic currency and foreign currency and the fluctuation range of exchange rate, and the monetary authority does not undertake the obligation to maintain the fluctuation limit of exchange rate, but allows the exchange rate to fluctuate freely with the change of supply and demand in the foreign exchange market.