Question

1. 1994-2005: From a Peg Within a Small Band To a De Facto Peg China began modifying its exchange regime in earnest in 1986, when the government introduced a dual- exchange rate regime under which exporters sold their earnings in a regulated market separate from the inner China market (and thus allowing those exporters to receive more RMB for a unit of foreign exchange than the inner market).( 17] In 1994, China merged the dual-currency system and instituted a market- based managed floating system.[ 18] Every day, the PBC determined and announced the RMB exchange rate within a 0.3% band around which the banks trade the RMB.[19] This system remained in place until the 1995 Asian financial crisis, when the PBC abandoned it in favor of a de facto peg against the U.S. dollar.[ 20] 2. 2005: From a De Facto Peg to a Crawling Peg In July 2005, China replaced the de facto peg with a short-lived crawling peg. In addition to adopting the crawling peg, the PBC allowed a one-time revaluation of the RMB from 8.28 to 8.11 RMB/US$ (i.e. 0.121 US$/RMB to 0.123 US$/RMB) (an appreciation of 2.1%).[21] Furthermore, the PBC linked the RMB exchange rate to a basket of currencies.[22] Under the new crawling peg, the RMB floated within a daily 0.3% band (later amended to 0.5%) which took as the central parity the previous working day's RMB exchange rate.[23] 3. 2005 and Onwards: From a Crawling Peg to a Managed Float The PBC, however, repealed the crawling peg after only seven days in favor of a managed float.[24] Under the managed float, the PBC determines the RMB exchange rate in view of the exchange rates of a basket of currencies (consisting of the U.S. dollar, the yen, the Euro, and a couple other currencies).[25] The managed float remains in operation and the PBC retains the right to decide the timing and manner of any future RMB revaluation.[26]

Can someone explain the differences between managed float, crawling peg, and de facto peg please?

Answer 1

A floating exchange rate system is one which is not fixed and it keeps on changing and it is decided by the market forces. But in the managed float system though there is floating exchange rate system but it is managed by the monetary authority of the country by interveining directly or indirectly to influence the interest rate without specifying the target exchange rate.

Crawling peg system of exchange rate is a type of fixed or pegged exchange rate system in which the value of domestic currency is pegged with reference to a foreign currency or a basket of currencies. But the monetary authority of the country resets it at regular intervals in accordance with the pre set criteria such as inflation rate.

De facto as its name says is the actual exchange rate prevailing in the economy which may be different from the one which the economy is claiming to follow which is called de jure. Any economy may declare to follow some exchange rate reigm but for some particular currency or for more than one they follow some other exchange rate and this original exchange rate which is identified by IMF is called de facto exchange rate system.