Exchange rate and exchange rate systems, which show the price of a country’s currency in terms of another country’s currency, are one of the important factors affecting the economic activities of countries. Exchange rate systems, which express an economic order that determines how the exchange rate will change according to the government’s or central bank’s intervention in the foreign exchange market, are very diverse, but basically consist of two axes as floating exchange rate regime and fixed exchange rate regime.
In the fixed exchange rate system, the exchange rate is determined by the central bank, not by market actors. In this system, the central bank links the exchange rate to one country currency or a basket of several currencies. In case of an increase or decrease in the exchange rate, the central bank intervenes in the market as a buyer or seller and ensures exchange rate stability. However, for the central bank to intervene in the market in this way, it must have sufficient foreign exchange stock.
If the central bank does not have enough foreign currency to intervene in the exchange rate, then it raises the exchange rate, that is, lowers the value of the national currency. In addition to this negative feature of the system, the formation of foreign payments imbalances due to inflation is another negative aspect of the system. On the other hand, reducing the economic instability caused by speculation and making it easier for economic actors to predict the future are the positive aspects of this system.
