Background
Managed currency refers to a system where the value of a country’s currency is influenced and regulated by its government or central bank through interventions in the foreign exchange markets. Unlike a floating currency system, where the value of the currency is determined solely by market forces, a managed currency combines elements of both market determination and government intervention.
Historical Context
The concept of managed currency became particularly prevalent in the 20th century, especially after the collapse of the Bretton Woods system in the early 1970s. Under Bretton Woods, currencies were pegged to the U.S. dollar, which in turn was convertible to gold. After its dissolution, more countries began adopting various degrees of currency management to address specific economic needs such as controlling inflation, boosting exports, or maintaining employment levels.
Definitions and Concepts
Managed currency involves active policy measures that can include:
- Buying or selling currencies: Governments or central banks buy/sell their own currency or foreign currencies to influence exchange rates.
- Setting exchange rate bands: Some systems follow a semi-fixed band where the currency can fluctuate only within a predetermined range.
- Twisting interest rates: Altering interest rates to influence capital flows and, consequently, the currency value.
Major Analytical Frameworks
Classical Economics
Classical economists earlier regulated currencies via gold standards which ensured limited government intervention.
Neoclassical Economics
Neoclassical economists treat currency management as a possible distortion of the free market mechanism.
Keynesian Economics
Keynesian economics supports government intervention, including in the currency markets, as necessary for stabilizing economies.
Marxian Economics
Marxian theory focuses more on labor value but recognizes currency management as a form of state intervention beneficial in capitalist economies.
Institutional Economics
Institutional economists study how currency management reflects institutional arrangements and government policies.
Behavioral Economics
Behavioral economists analyze how public and investor sentiments towards government policy affects currency prices.
Post-Keynesian Economics
Post-Keynesian theorists encourage active currency management to stabilize speculative capital flows and assure economic balances.
Austrian Economics
Austrian economists criticize managed currencies vehemently and advocate for free-market mechanisms and possibly gold-backed currencies.
Development Economics
Development economics views managed currency as essential in emerging markets to protect from volatile capital flows and ensure economic stability.
Monetarism
Monetarists may see currency management as harmful if it disrupts money supply and inflation targeting.
Comparative Analysis
Managed currencies stand in contrast to purely floating exchange rate systems where hands-off approaches often prevail. Comparing managed currencies with floating currencies reveals differences in government roles, market reactions, and economic outcomes. The influence on trade balances, investment flows, and national competitiveness varies widely between the two systems.
Case Studies
- China: Uses managed currency to maintain export competitiveness.
- Japan: Intervenes occasionally to maintain economic stability during volatile times.
- India: Utilizes RBI for smoothing sharp currency fluctuations and supporting stabilisation.
Suggested Books for Further Studies
- “Exchange Rate Regimes: Fix or Float?” by Rudiger Dornbusch
- “The Economics of Exchange Rates” by Paul De Grauwe
- “Currency Wars: The Making of the Next Global Crisis” by James Rickards
Related Terms with Definitions
- Floating Currency: A currency whose value is allowed to fluctuate according to the foreign exchange market.
- Fixed Exchange Rate: A currency value tied or pegged mostly to another currency, typically a more stable one.
- Forex Reserves: Holdings of foreign currencies and gold by a country’s central bank that are used to back liabilities and influence monetary policy.
- Currency Peg: Stabilizing country’s currency by fixing its exchange rate to another currency.