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Fixed Exchange Rate

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PPGPortal > Home > Concept Dictionary > F, G, H > Fixed Exchange Rate
 

Fixed Exchange Rate 

A currency has a “fixed” exchange rate if the government commits to using its reserves of foreign currency to maintain the exchange rate at a particular pre-set level.

(Peter Dungan, Toronto PPG1002H and Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.)

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Governments maintain a fixed exchange rate by actively intervening in the market for foreign exchange in order to prevent their currency from either appreciating or depreciating in value. If there is a fixed exchange rate for a currency, that currency is still available on the open market, but the central bank is committed to intervening to buy or sell its own currency if the exchange rate deviates from a set value.

     

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