The Taxonomy of Exchange Rate Regimes: Theoretical and Practical Classification Schemes

Abstract

This chapter deals with the theoretical and practical classification schemes of exchange rate arrangements. What we mean by ‘theoretical classification’ is the theoretical spectrum of exchange rate arrangements falling between the two extremes of perfectly fixed and perfectly flexible exchange rates. The classification is ‘theoretical’ in two senses, the first of which is that any of the classified arrangements may or may not have been tried in practice. In another sense, the classification is ‘theoretical’ because the underlying concepts are abstract and generic, unlike what we find in the ‘practical’ classification. For example, we find the abstract and generic concept of fixed exchange rates in the theoretical classification, but in the practical classification we find the concepts of hard pegs, soft pegs, single-currency pegs and multicurrency pegs, all of which being different kinds of fixed exchange rates that have been tried in practice.