Fixed versus floating exchange rates – which is best for an economy?
Each country must decide on the most appropriate currency regime or system. There is an ongoing debate in economics about the merits and de-merits of fixed versus floating exchange rates. • 1973-1990: UK operated with a managed floating exchange rate. There was some intervention by the central bank to influence the exchange rate and government was in control of interest rates • October 1990- September 1992: UK a member of the European exchange rate mechanism (ERM) – the exchange rate was a specific target of economic policy. Interest rates had to be set at a level consistent with keeping sterling within the agreed ERM bands (limits) • September 1992 – present day: the UK has operated with a free-floating exchange rate – no intervention by the Bank of England. Exchange rate is purely market determined. Since 1999, the Euro has been in existence as twelve nations have established a single currency. Sterling floats freely against the Euro and also against the dollar, yen etc. The case for
