Classification of Exchange Rate Arrangements and Monetary Policy Frameworks Home Page





Classification of Exchange Rate Arrangements and Monetary Policy Frameworks1

Data as of June 30, 2004

This classification system is based on members' actual, de facto, arrangements as identified by IMF staff, which may differ from their officially announced arrangements. The scheme ranks exchange rate arrangements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate paths. It distinguishes among different forms of exchange rate regimes, in addition to arrangements with no separate legal tender, to help assess the implications of the choice of exchange rate arrangement for the degree of monetary policy independence. The system presents members' exchange rate regimes against alternative monetary policy frameworks with the intention of using both criteria as a way of providing greater transparency in the classification scheme and to illustrate that different exchange rate regimes can be consistent with similar monetary policy frameworks. The following explains the categories.

Exchange Rate Regimes

Exchange Arrangements with No Separate Legal Tender

The currency of another country circulates as the sole legal tender (formal dollarization), or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Adopting such regimes implies the complete surrender of the monetary authorities' independent control over domestic monetary policy.

Currency Board Arrangements

A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. This implies that domestic currency will be issued only against foreign exchange and that it remains fully backed by foreign assets, eliminating traditional central bank functions, such as monetary control and lender-of-last-resort, and leaving little scope for discretionary monetary policy. Some flexibility may still be afforded, depending on how strict the banking rules of the currency board arrangement are.

Other Conventional Fixed Peg Arrangements

The country (formally or de facto) pegs its currency at a fixed rate to another currency or a basket of currencies, where the basket is formed from the currencies of major trading or financial partners and weights reflect the geographical distribution of trade, services, or capital flows. The currency composites can also be standardized, as in the case of the SDR. There is no commitment to keep the parity irrevocably. The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate-or the maximum and minimum value of the exchange rate may remain within a narrow margin of 2 percent-for at least three months. The monetary authority stands ready to maintain the fixed parity through direct intervention (i.e., via sale/purchase of foreign exchange in the market) or indirect intervention (e.g., via aggressive use of interest rate policy, imposition of foreign exchange regulations, exercise of moral suasion that constrains foreign exchange activity, or through intervention by other public institutions). Flexibility of monetary policy, though limited, is greater than in the case of exchange arrangements with no separate legal tender and currency boards because traditional central banking functions are still possible, and the monetary authority can adjust the level of the exchange rate, although relatively infrequently.

Pegged Exchange Rates within Horizontal Bands

The value of the currency is maintained within certain margins of fluctuation of at least ±1 percent around a fixed central rate or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent. It also includes arrangements of countries in the exchange rate mechanism (ERM) of the European Monetary System (EMS) that was replaced with the ERM II on January 1, 1999. There is a limited degree of monetary policy discretion, depending on the band width.

Crawling Pegs

The currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators, such as past inflation differentials vis-à-vis major trading partners, differentials between the inflation target and expected inflation in major trading partners, and so forth. The rate of crawl can be set to generate inflation-adjusted changes in the exchange rate (backward looking), or set at a preannounced fixed rate and/or below the projected inflation differentials (forward looking). Maintaining a crawling peg imposes constraints on monetary policy in a manner similar to a fixed peg system.

Exchange Rates within Crawling Bands

The currency is maintained within certain fluctuation margins of at least ±1 percent around a central rate-or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent-and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. The degree of exchange rate flexibility is a function of the band width. Bands are either symmetric around a crawling central parity or widen gradually with an asymmetric choice of the crawl of upper and lower bands (in the latter case, there may be no preannounced central rate). The commitment to maintain the exchange rate within the band imposes constraints on monetary policy, with the degree of policy independence being a function of the band width.

Managed Floating with No Predetermined Path for the Exchange Rate

The monetary authority attempts to influence the exchange rate without having a specific exchange rate path or target. Indicators for managing the rate are broadly judgmental (e.g., balance of payments position, international reserves, parallel market developments), and adjustments may not be automatic. Intervention may be direct or indirect.

Independently Floating

The exchange rate is market-determined, with any official foreign exchange market intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a level for it.

Monetary Policy Framework

The exchange rate regimes are presented alongside monetary policy frameworks in order to present the role of the exchange rate in broad economic policy and help identify potential sources of inconsistency in the monetary-exchange rate policy mix.

Exchange Rate Anchor

The monetary authority stands ready to buy/sell foreign exchange at given quoted rates to maintain the exchange rate at its pre-announced level or range; the exchange rate serves as the nominal anchor or intermediate target of monetary policy. This type of regime covers exchange rate regimes with no separate legal tender; currency board arrangements; fixed pegs with and without bands; and crawling pegs with and without bands.

Monetary Aggregate Anchor

The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.

Inflation Targeting Framework

This involves the public announcement of medium-term numerical targets for inflation with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for attaining its inflation objectives. Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

Fund-Supported or Other Monetary Program

This involves implementation of monetary and exchange rate policies within the confines of a framework that establishes floors for international reserves and ceilings for net domestic assets of the central bank. Indicative targets for reserve money may be appended to this system.

Other

The country has no explicitly stated nominal anchor but rather monitors various indicators in conducting monetary policy, or there is no relevant information available for the country.


1Based on "Exchange Arrangements and Foreign Exchange Markets: Developments and Issues" (SM/02/233, July 22, 2002).


Table. De Facto Exchange Rate Arrangements and Anchors of Monetary Policy
as of June 30, 20041
Exchange Rate Regime
(Number of countries)
Monetary Policy Framework
Exchange rate anchor Monetary
aggregate
target
Inflation
targeting
framework
IMF-
supported
or other
monetary
program
Other
Exchange arrangements with no separate legal tender (41) Another
currency
as legal
tender (9)



ECCU (6)2
 

CFA franc zone (14)
      Euro area (12)3
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
WAEMU CAEMC
Ecuador
El Salvador4
Kiribati
Marshall Islands
Micronesia,
   Fed.
   States of
Palau
Panama
San Marino
Timor-
   Leste, Dem.
   Rep. of
Antigua and
   Barbuda
Dominica*
Grenada
St. Kitts and
   Nevis
St. Lucia
St. Vincent
   and the
   Grenadines
Benin
Burkina Faso*

Côte d'Ivoire*
Guinea-Bissau
Mali*
Niger
Senegal*
Togo
Cameroon*
Central
   African
   Rep.
Chad
Congo,
   Rep. of
Equatorial
    Guinea
Gabon*
Currency board arrangements (7) Bosnia and Herzegovina
Brunei Darussalam
Bulgaria
China-Hong Kong SAR
Djibouti
Estonia9
Lithuania9
       
Other conventional fixed peg arrangements (42) Against a single currency (34) Against a
composite
(8)
China,
   P.R. of†6
     
Aruba
Bahamas, The5
Bahrain, Kingdom of
Barbados
Belize
Bhutan
Cape Verde*
China, P.R. of†6
Comoros7
Eritrea
Guinea6
Iraq 6
Jordan*6
Kuwait
Lebanon6
Lesotho*
Macedonia, FYR*6
Malaysia
Maldives
Namibia
Nepal*
Netherlands Antilles
Oman
Qatar
Saudi Arabia
Seychelles6
Suriname5,6
Swaziland
Syrian Arab Rep.5
Turkmenistan6
Ukraine*6
United Arab Emirates
Venezuela, Rep.
   Bolivariana de
Zimbabwe6
Botswana5
Fiji
Latvia
Libyan Arab
   Jamahiriya
Malta
Morocco
Samoa
Vanuatu
Pegged exchange rates within horizontal bands (5) 8 Within a cooperative arrangement (2) Other band arrangements (3)   Hungary†    

Denmark9
Slovenia9

Cyprus
Hungary†
Tonga
Crawling
pegs (6)
Bolivia*
Costa Rica
Honduras*6
Nicaragua*
Solomon Islands6
Tunisia
Tunisia   Honduras*6  
Exchange rates within crawling bands (2)10 Belarus
Romania6
  
       
Managed floating with no pre-determined path for the exchange rate (48)       Bangladesh*
Cambodia5
Egypt5
Ghana*6
Guyana*
Indonesia
Iran, I.R. of
Jamaica6
Mauritius
Moldova
Sudan
Zambia*
Czech Rep.
Peru*6
Thailand
Argentina*
Azerbaijan*
Croatia
Ethiopia*
Georgia*
Haiti3,6
Kenya*
Kyrgyz Rep.*
Lao PDR*5
Mongolia*
Mozambique6
Pakistan*
Rwanda*
Serbia and
Montenegro*11
Tajikistan*

Vietnam
Afghanistan,
   I.S. of
Algeria3
Angola 3
Burundi*3
Gambia, The* 3,6
India3
Kazakhstan3
Mauritania*
Myanmar3,5,6
Nigeria6
Paraguay*3
Russian Federation3
São Tomé
   and Príncipe
Singapore3
Slovak Rep.3
Trinidad and
   Tobago
Uzbekistan3,5
Independently floating (36)    Malawi*
Sierra Leone*6
Sri Lanka*
Uruguay*
Yemen,
   Rep. of
Australia
Brazil*
Canada
Chile5
Colombia*
Guatemala
Iceland
Israel†6
Korea
Mexico
New Zealand
Norway
Philippines
Poland
South Africa
Sweden
Turkey*
United Kingdom
Albania*
Armenia*
Congo, Dem.
   Rep. of*
Madagascar*
Tanzania*
Uganda*
Dominican
   Rep.*3
Japan 3
Liberia3,6
Papua New
   Guinea3
Somalia5,12
Switzerland3
United States3
Sources: IMF staff reports; Recent Economic Developments; and International Financial Statistics.
1An asterisk (*) indicates that the country has an IMF-supported or other monetary program. A dagger (†) indicates that the country adopts more than one nominal anchor in conducting monetary policy (it should be noted, however, that it would not be possible, for practical reasons, to include in this table which nominal anchor plays the principal role in conducting monetary policy).
2The ECCU has a currency board arrangement.
3This country/these countries have no explicitly stated nominal anchor, but rather monitors various indicators in conducting monetary policy.
4The printing of new colones, the domestic currency, is prohibited, but the existing stock of colones will continue to circulate along with the U.S. dollar as legal tender until all colón notes wear out physically.
5The member maintains an exchange arrangement involving more than one foreign exchange market. The arrangement shown is that maintained in the major market.
6The regime operating de facto in the country is different from its de jure regime.
7Comoros has the same arrangement with the French Treasury as the CFA franc zone countries.
8The band widths for these countries are as follows: Cyprus ±15%, Denmark ±2.25%, Hungary ±15%, Slovenia ±15%, and Tonga ±5%.
9The member participates in the ERM II of the European monetary system.
10The band widths for these countries are adjusted frequently (Belarus) or unannounced (Romania).
11 The description of the exchange rate regime applies to the Republic of Serbia only, which accounts for about 93% of the economy of Serbia and Montenegro; in the Republic of Montenegro, the euro is legal tender. In the UN-administered province of Kosovo, the euro is the most widely used currency.
12As insufficient information on the country is available to confirm this classification, the classification of the last official consultation is used.
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