What are the differences between floating, fixed and managed exchange rates?

Can u help me summarise the diff btw floating, fixed and managed exchange rate mkt?

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Here’s a brief summary as below. For more details, please refer to my notes.

Floating Exchange Rate:

• The exchange rate is determined by supply and demand in the foreign exchange market.
• Currencies can fluctuate freely based on economic factors, interest rates, and speculation.
• Can be more volatile, which can create uncertainty for businesses involved in international trade.
• Does not allow the country to utilise exchange rate as a monetary policy tool.
• Can act as a self-correcting mechanism for the balance of trade.

Fixed Exchange Rate:

• The government (central bank) sets and maintains the exchange rate at a fixed level.
• The central bank intervenes in the foreign exchange market by buying or selling its own currency to maintain the fixed rate.
• Provides stability and predictability for businesses engaged in international trade.
• Can be used by the country as a monetary policy tool.
• Unable to self-correct the balance of trade and may allow surplus or deficits to persist.

Managed Exchange Rate (Dirty Float):

• A hybrid system that combines elements of both floating and fixed exchange rates.
• The exchange rate is allowed to fluctuate within a band or target zone set by the central bank.
• The central bank intervenes in the market to prevent the exchange rate from moving outside the target zone.
• Offers some degree of flexibility for monetary policy while maintaining a degree of exchange rate stability.

Summary of characteristics:

Exchange Rate Market	Determination	Flexibility
Floating	Market forces of supply and demand	Highly flexible
Fixed	Government intervention	Inflexible (red line in graph below)
Managed	Combination of market forces and government intervention	Somewhat flexible (within blue band in graph below)