Definition
- Fixed exchange rate
- A fixed exchange rate, or hard peg, is a policy in which the central bank sets a fixed value for the exchange rate, often within a narrow band.
Example
Can you think of an example of fixed exchange rate?
A country fixing its currency at 8 units to the US dollar must buy its own currency with its reserves whenever traders sell it, and raise interest rates if those reserves run low.
Test yourself
Can you name the three types of exchange rate system?