Unit 4 Macro: The Rise of Managed Exchange RatesThursday, April 10, 2014
by Geoff Riley
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The new IMF report on the global economy published in April 2014 includes a focus on the currency regimes chosen by emerging market countries. An increasing number of central banks have switched from free-floating exchange rates to managed currency regimes - perhaps because they want to make more active use of the exchange rate as an instrument of monetary policy.
The chart below is taken from the IMF report - what can you see happening here?

The driving motivation for managing the exchange rate appears to be that central banks want to prevent damaging currency appreciations (with the potential for damaging export industries) and also have the freedom to act against severe currency weakness e.g. during times when foreign capital is flowing out of a country.
Overall the feeling is that managed exchange rates provide an instrument for making the output, net exports, investment, jobs and inflation in emerging countries less volatile in a world of increasingly frequent external shocks.
That said managed floating involves risks too.
Free floating exchange rates are perhaps the best option for countries exposed to unpredictable commodity prices and capital flows. Choosing a floating exchange rate makes it easy to adjust to economic shocks, and the currency itself is less vulnerable to speculative attacks.
There are doubts about the effectiveness of central bank intervention in currency markets especially if they want to prevent the introduction of full-scale capital controls.
Globally around one third of IMF member countries operate with a floating exchange rate but only 16% have a fully free floating system