## 1. Shares of Classifications Using the 1998 and 2009 Methodologies

## Source details

**Canonical URL:** [1. Shares of Classifications Using the 1998 and 2009 Methodologies](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09211.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09211.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09211.pdf.json)

---

### I. Introduction and Purpose
- Since 1998, IMF staff has published a classification of countries’ de facto exchange rate arrangements.
- Experience operating the 1998 classification highlighted two main challenges:
  - the residual category of managed floating has become overly heterogeneous; and
  - intervention practices used in characterizing arrangements have become increasingly complex, while adequate data on intervention are sometimes not available.
- The existing IMF staff classification system has been modified; the revised classification will be published in the 2009 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) and in the IMF’s 2009 Annual Report.
- The revised classification will be used in all Article IV staff reports issued on or after February 1, 2009, and is intended to be revised backward in time. Country authorities may comment on changes before publication.

### II. Key Changes in the Revised Classification System
- Replacements and clarifications:
  - replacing the current distinction between managed and independent floating with two new categories: floating and free floating, with clearer definitions;
  - drawing a distinction between formal fixed and crawling pegs, and arrangements that are merely peg-like or crawl-like;
  - increasing transparency by basing the system on rules implementable using specified information, with a more clearly circumscribed role for judgment.
- Expected benefits:
  - greater consistency and objectivity of classifications across countries;
  - expedited classification process and resource conservation;
  - improved transparency for bilateral and multilateral surveillance.

### III. Composition of Arrangements (Table 1, as of April 30, 2008)
- Aggregate totals:
  - Total countries classified: 188 under both 1998 de facto system and 2009 de facto system.
- Hard pegs (counts):
  - 1998 de facto system: 23
  - 2009 de facto system: 23
  - Arrangement with no separate legal tender: 10 (1998); 10 (2009)
  - Currency board arrangement: 13 (1998); 13 (2009)
- Soft pegs (counts and subcategories):
  - Soft pegs total:
    - 1998 de facto system: 81
    - 2009 de facto system: 78
  - Conventional fixed peg vs Conventional pegged arrangement:
    - 1998: Conventional fixed peg 68
    - 2009: Conventional pegged arrangement 45
  - Stabilized arrangement (2009): 22
  - Intermediate pegs (of which):
    - 1998: 13
    - 2009: 11
  - Pegged exchange rate within horizontal bands:
    - 1998: 3
    - 2009: Pegged exchange rate within horizontal bands 3
  - Crawling peg:
    - 1998: 8
    - 2009: Crawling peg 5
  - Crawling band (1998): 2 (dropped in revised taxonomy)
  - Crawl-like arrangement (2009): 3
- Floating arrangements:
  - Floating arrangements total:
    - 1998 de facto system: 84
    - 2009 de facto system: 75
  - Managed floating / Floating / Independently floating / Free floating:
    - 1998: Managed floating 44; Independently floating 40
    - 2009: Floating 39; Free floating 36
- Other managed arrangements (residual):
  - 1998: n.a.
  - 2009: 12
- Note: "Information for end-April 2009 will be published in the 2009 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), forthcoming."

### IV. Principles, Objectives, and Operational Considerations
- Underlying principles of the de facto classification:
  - capturing outcomes of actual exchange rate policies on a de facto basis rather than de jure descriptions;
  - avoiding value judgments on policy appropriateness or arrangement choice;
  - adopting a backward-looking approach describing outcomes of past policies.
- Objectives:
  - support IMF surveillance by bringing greater transparency, consistency, and evenhandedness to the description of policy outcomes;
  - help IMF staff identify institutional and operational obstacles to policy objectives;
  - provide a summary description to facilitate cross-country analysis.
- Operational design goals:
  - reflect the wide range of arrangements with no overlap among categories;
  - consistently classify countries according to transparent and verifiable rules;
  - be operationally feasible without ambiguity or unnecessary delays.
- Caveat: the classification captures basic features (notably the extent to which the exchange rate is market-determined) and should be complemented by more detailed descriptions of exchange rate policies.

### V. Need for Change: Residual Heterogeneity and Intervention Complexity
- Residual category problem:
  - Figure 1 (Development of the Residual Category, 1975–2008) shows the residual category's evolution and heterogeneity; note that for end-April 2008 the residual category was sizeable under past taxonomies.
  - Less than 10 percent of the IMF’s membership fell into the residual category at end-April 2008 under the revised taxonomy (see section on "other managed arrangements").
- Operational problems under the 1998 system:
  - the distinction between independent floating and managed floating relied too heavily on judgment;
  - many countries resisted reclassification to managed float or fixed peg, arguing no commitment to defend a particular exchange rate level.
- Intervention practices:
  - growing ability to switch between domestic and foreign currency debt on commercial terms;
  - income flows (e.g., oil) may or may not be channeled through the central bank;
  - buildup of reserve-like assets in oil stabilization funds or longer-term investment funds;
  - conventional measures of intervention may understate the degree to which some floating rates are managed;
  - lack of availability of data on foreign exchange intervention compounds problems.

### VI. The Revised De Facto Classification System: Structure and Decision Process
- Continuity retained:
  - the distinction between hard pegs, soft pegs, and floats is preserved.
- Use of de jure information:
  - whenever consistent with observed policies and outcomes, countries are classified in line with their de jure or declared exchange rate arrangements;
  - information on de jure arrangements is systematically collected as part of the AREAER exercise.
  - hard pegs (currency boards, formal dollarization), conventional fixed pegs, crawling pegs, and pegged exchange rates within horizontal bands are always and only confirmed de jure arrangements when appropriate.
- Three-step decision process (stylized in Figure 2):
  - Step 1: Distinguish between de facto arrangements that are floating (market-determined) and those that are not.
  - Step 2: Non-floating de facto arrangements are subdivided into stabilized and crawl-like; these are defined using verifiable quantitative and qualitative criteria. Stabilized arrangements can be considered peg-like for many analysis purposes.
  - Step 3: Floating arrangements are refined by identifying a subset as free floating; classification as free floating requires that specific quantitative and qualitative criteria are met.
  - Any arrangement not falling into these categories is classified as other managed arrangement (new residual category).

### VII. Criteria and Evidence for Key Classifications
- Floating criterion:
  - the exchange rate is largely market-determined;
  - observed exchange rate behavior complemented by information on monetary and foreign exchange policy actions (notably intervention) allows judgments on whether the rate is primarily market-determined or driven by official actions.
- Free floating:
  - requires that there has been no intervention over the past six months, with the exception of limited intervention to address disorderly market conditions.
  - footnote: "The definition allows for 3 instances of intervention, each lasting no more than 3 business days. Normally, disorderly market conditions last for only 1 or 2 days."
  - if IMF staff lack sufficient information/data to verify this criterion, the arrangement is classified as floating (not free floating). Thus data availability, rather than subjective judgment, plays a key role.
- Stabilized and crawl-like:
  - used where de facto and de jure arrangements differ and the exchange rate is not largely market-determined but meets statistical criteria for a soft peg.
  - terminology emphasizes a backward-looking description that avoids subjective interpretation of authorities’ intentions.
  - when statistical criteria for a soft peg are met, there is a presumption the arrangement is not floating.
- Information IMF staff may request to make judgments:
  - direct and indirect intervention, foreign exchange market turnover (spot and derivatives), reserve level and currency composition, interest rates, foreign exchange activities of public enterprises and sovereign wealth funds, debt composition and debt management policies, macroeconomic data reliability, and other relevant items.
  - consultations with country authorities play an important role.
  - in case of doubt, statistical classification criteria are determinative.

### VIII. Other Managed Arrangements (New Residual Category)
- Definition and prevalence:
  - captures countries where de facto and de jure arrangements differ, which manage exchange rates but are not floating, and which exhibit frequent or irregular policy changes.
  - as indicated in Table 1, less than 10 percent of the IMF’s membership fell into this residual category at end-April 2008.
- Operational adjustments to avoid spurious changes:
  - the usual assessment period can be lengthened by up to three months to avoid noisy reclassifications in borderline cases.

### IX. Treatment of Outliers, Spikes, and Realignments
- The "crawling band" category has been dropped due to infrequent use.
- Allowances for occasional spikes and realignments to enhance comparability:
  - allows for one episode of spikes lasting at most five days per quarter, and one step realignment in six months.
  - footnote: "Such spikes may be the result of short-term one-off exchange rate pressures or disorderly market conditions. For countries with pegged exchange rate regimes, there are very few instances where countries exceed their ±1 percent bands. The five-day period broadly corresponds to the period of one week specified for broken cross rates under the policy on Multiple Currency Practices (Decision No. 6790-(81/43), adopted 3/20/81, as amended), but the main reason for setting it relatively wide is to allow for diverging practices across countries, in that some need more time to manage disorderly conditions than others."
  - distinction between spikes (temporary) and devaluations/revaluations (which permanently move the median exchange rate) noted; current practice allows four adjustments of over 1 percent per year, which would be tightened under the revised methodology.
- Quantitative indicators:
  - used to identify a minimum absolute and relative level of market pressures to warrant conclusions about exchange rate policies from observed stability.

### Appendix I. Revised Classification System—Definitions of Categories
- Hard pegs
  - Exchange arrangement with no separate legal tender
    - Currency of another country circulates as the sole legal tender (formal dollarization).
    - Implies the complete surrender of the monetary authorities’ control over domestic monetary policy.
    - Note: effective January 1, 2007, exchange arrangements of countries that belong to a monetary or currency union in which the same legal tender is shared by the members of the union are classified under the arrangement governing the joint currency.
    - The new classification is based on the behavior of the common currency; the previous classification was based on the lack of a separate legal tender. The change is definitional only and not a judgment that there has been a substantive change in the exchange arrangement or other policies.
  - Currency board arrangement
    - 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 fulfillment of the legal obligation.
    - Domestic currency issued only against foreign exchange and remains fully backed by foreign assets.
    - Eliminates traditional central bank functions such as monetary control and lender-of-last-resort, leaving little scope for discretionary monetary policy.
    - Some flexibility may still be afforded, depending on the strictness of the banking rules of the currency board arrangement.

- Soft pegs
  - Conventional pegged arrangement
    - Country formally (de jure) pegs its currency at a fixed rate to another currency or a basket of currencies.
    - Anchor currency or basket weights are public or notified to the IMF.
    - Authorities stand ready to maintain the fixed parity through direct intervention or indirect intervention (e.g., interest rate policy, foreign exchange regulations, moral suasion, intervention by other public institutions).
    - No commitment to irrevocably keep the parity.
    - Formal arrangement must be confirmed empirically: the exchange rate may fluctuate within narrow margins of less than ±1% around a central rate—or the maximum and minimum value of the spot market exchange rate must remain within a narrow margin of 2%—for at least six months.
  - Stabilized arrangement
    - Spot market exchange rate remains within a margin of 2% for six months or more (with the exception of a specified number of outliers or step adjustments), and is not floating.
    - Margin of stability can be met with respect to a single currency or a basket; anchor ascertained/confirmed using statistical techniques.
    - Requires that statistical criteria are met and that exchange rate remains stable as a result of official action (including structural market rigidities).
    - Does not imply a policy commitment by the country authorities.
  - Crawling peg
    - Classification involves confirmation of the country authorities’ de jure exchange rate arrangement.
    - Currency adjusted in small amounts at a fixed rate or in response to changes in selected quantitative indicators (e.g., past inflation differentials vis-à-vis major trading partners or differentials between the inflation target and expected inflation in major trading partners).
    - Rate of crawl can be backward looking (generate inflation-adjusted changes) or forward looking (predetermined fixed rate and/or below projected inflation differentials).
    - Rules and parameters are public or notified to the IMF.
  - Crawl-like arrangement
    - Exchange rate must remain within a narrow margin of 2% relative to a statistically identified trend for six months or more (with the exception of a specified number of outliers), and the arrangement cannot be considered floating.
    - Normally requires a minimum rate of change greater than allowed under a stabilized (peg-like) arrangement.
    - Considered crawl-like with an annualized rate of change of at least 1%, provided the exchange rate appreciates or depreciates in a sufficiently monotonic and continuous manner.
  - Pegged exchange rate within horizontal bands
    - Involves confirmation of the country authorities’ de jure exchange rate arrangement.
    - Value of the currency maintained within margins of fluctuation of at least ±1% around a fixed central rate, or the margin between the maximum and minimum value of the exchange rate exceeds 2%.
    - Includes arrangements of countries in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), replaced with the ERM II on January 1, 1999, for those countries with margins of fluctuation wider than ±1%.
    - The central rate and width of the band are public or notified to the IMF.

- Floating arrangements
  - Floating
    - Largely market determined, without an ascertainable or predictable path for the rate.
    - An exchange rate satisfying statistical criteria for a peg-like or crawl-like arrangement will be classified as such unless stability is clearly not the result of official actions.
    - Foreign exchange market intervention may be direct or indirect and serves to moderate the rate of change and prevent undue fluctuations.
    - Policies targeting a specific level of the exchange rate are incompatible with floating.
    - Indicators for managing the rate are broadly judgmental (e.g., balance of payments position, international reserves, parallel market developments).
    - Floating arrangements may exhibit more or less exchange rate volatility, depending on the size of the shocks affecting the economy.
  - Free floating
    - Classified as free floating if intervention occurs only exceptionally, aims to address disorderly market conditions, and the authorities have provided information or data confirming that intervention has been limited to at most three instances in the previous six months, each lasting no more than three business days.
    - If the information or data required are not available to the IMF staff, the arrangement will be classified as floating.

- Residual
  - Other managed arrangement
    - Residual category used when the exchange rate arrangement does not meet the criteria for any of the other categories.
    - Arrangements characterized by frequent shifts in policies may fall into this category.

### Appendix II. The Evolution of the IMF’s Classification Taxonomies
- 1. Bretton Woods System (July 1944–July 1971)
  - Par value: member maintains an exchange rate within ±1 percent around its par value. After 1959, cross parities of up to ±2 percent were allowed, provided each currency maintained a ±1 percent band vis-à-vis its par value. Par values vis-à-vis the U.S. dollar or gold of a certain weight and fineness.
  - Fluctuating: 18 countries adopted fluctuating arrangements for various periods.
- 2. Smithsonian realignment (December 1971–January 1974)
  - Par value: member maintains an exchange rate within ±2.25 percent around its par value or, for cross parities, ±4.5 percent. Par values vis-à-vis any member’s currency, gold, or the SDR.
  - After November 7, 1973, a member could maintain margins of up to ±2.25 percent against an intervention currency regardless of that currency’s margins or resulting cross-margins.
  - Fluctuating: some countries maintained flexible arrangements during this period.
- 3. 1975 Taxonomy (June 1975–September 1976)
  - Pegged to a single currency: exchange rate within ±2.25 percent around a central rate vis-à-vis a single currency.
  - Pegged to a composite (including the SDR): exchange rate within ±2.25 percent around a central rate vis-à-vis a basket of currencies or the SDR.
  - Floating—adjusted according to a set of indicators: exchange rate within ±2.25 percent around a central rate, authorities adjust central value based on indicators or regularly.
  - Floating—common margins: cooperative arrangement with bands of at most ±2.25 percent around a central rate vis-à-vis each-others’ currencies (a "snake").
  - Floating—independently: deviations greater than ±2.25 percent allowed.
- 4. 1977 Taxonomy (November 1976–December 1981)
  - Pegged to a single currency: exchange rate within ±2.25 percent around a central rate.
  - Pegged to a composite (including the SDR): exchange rate within ±2.25 percent around a central rate.
  - Adjusted according to a set of indicators: authorities set the rate for a specified short time interval and stand open to buy and sell foreign exchange within narrow bands around that rate.
  - Cooperative exchange arrangements: group of countries maintain exchange rates within bands of at most ±2.25 percent around a central rate (a "snake").
- 5. 1982 Taxonomy (January 1982–October 1998)
  - Pegged to a single currency: exchange rate within zero or very narrow margins seldom exceeding ±1 percent around a central rate vis-à-vis a single currency. Beginning in July 1992, fully dollarized countries included in this category.
  - Pegged to a composite (including the SDR): exchange rate within zero or very narrow margins seldom exceeding ±1 percent around a central rate vis-à-vis a basket or the SDR.
  - Flexibility limited vis-à-vis a single currency: margins of ±2.25 percent vis-à-vis another member’s currency or the SDR.
  - Flexibility limited vis-à-vis a cooperative arrangement: margins within ±2.25 percent with respect to cross-rates.
  - Adjusted according to a set of indicators: authorities set the rate for a short interval and stand open to buy and sell foreign exchange at a rate determined on the basis of certain indicators.
  - Other managed floating: flexible arrangements not covered by “adjusted according to a set of indicators” or “independently floating.”
  - Independently floating: authorities allow the exchange rate to move continuously to reflect market forces; intervention, if any, influences but does not fully neutralize the speed of movement.
- 6. De facto Classification Taxonomy (November 1998–January 2009)
  - Exchange arrangement with no separate legal tender: legislatively surrendered sole control over domestic monetary policy. Two types: (1) another currency as legal tender (may issue subsidiary units at par); and (2) currency union, with banknotes issued by and exchange rate policy determined by a multinational central bank in which the country has representation. Beginning in January 2007, countries in the second group classified based on the arrangement governing the joint currency.
  - Currency board arrangement: explicit legislative commitment to exchange domestic currency for a specified foreign currency at a specified rate, with restrictions on the issuing authority, including a backing requirement and restrictions on some typical central bank activities.
  - Conventional pegged arrangement: fixes exchange rate to an anchor within margins of less than ±1 percent. Need not be irrevocable. May be formal or de facto; de facto peg must be actively maintained for at least three months. In January 2007, observation period lengthened to 6 months.
  - Pegged exchange rate within horizontal bands: maintained within a band with range at least 2 percent (or ±1 percent around a central rate). ERM/ERM II countries included unless narrower margins explicitly maintained.
  - Crawling peg: exchange rate adjusted periodically/frequently in small amounts in response to quantitative indicators or to effect gradual devaluation/revaluation against a single currency or a basket. Exchange rate remains within margins of less than ±1 percent around a central rate. Beginning in January 2007, (1) included countries whose exchange rates remained within a sliding range of ±1 percent for at least six months as a result of intervention without an explicit commitment; and (2) arrangements where direction of crawl could change were classified as managed floating.
  - Crawling band: exchange rate adjusted in small amounts but may fluctuate in a range of ±1 percent or more or a range of 2 percent. Extremities may be symmetric or asymmetrically adjusted.
  - Managed floating with no preannounced path for the exchange rate (in 2005, "preannounced" replaced with "predetermined"): monetary authority attempts to influence the level without a specific path or target; rate essentially market determined. Indicators for managing the rate are broadly judgmental; adjustments may not be automatic. Intervention may be direct or indirect. Beginning in January 2007, arrangements with automatic adjustment that no longer qualify as crawling arrangements were classified in this group.
  - Independently floating: 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 short run rather than aiming at a level.

*Source: Staff calculations.*

### 1. Shares of Classifications Using the 1998 and 2009 Methodologies......................................4

### 1. Shares of Classifications Using the 1998 and 2009 Methodologies......................................4

### I. Introduction and Purpose
- Since 1998, IMF staff has published a classification of countries’ de facto exchange rate arrangements.
- Experience operating the 1998 classification highlighted two main challenges:
  - the residual category of managed floating has become overly heterogeneous; and
  - intervention practices used in characterizing arrangements have become increasingly complex, while adequate data on intervention are sometimes not available.
- The existing IMF staff classification system has been modified; the revised classification will be published in the 2009 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) and in the IMF’s 2009 Annual Report.
- The revised classification will be used in all Article IV staff reports issued on or after February 1, 2009, and is intended to be revised backward in time. Country authorities may comment on changes before publication.

### II. Key Changes in the Revised Classification System
- Replacements and clarifications:
  - replacing the current distinction between managed and independent floating with two new categories: floating and free floating, with clearer definitions;
  - drawing a distinction between formal fixed and crawling pegs, and arrangements that are merely peg-like or crawl-like;
  - increasing transparency by basing the system on rules implementable using specified information, with a more clearly circumscribed role for judgment.
- Expected benefits:
  - greater consistency and objectivity of classifications across countries;
  - expedited classification process and resource conservation;
  - improved transparency for bilateral and multilateral surveillance.

### III. Composition of Arrangements (Table 1, as of April 30, 2008)
- Aggregate totals:
  - Total countries classified: 188 under both 1998 de facto system and 2009 de facto system.
- Hard pegs (counts):
  - 1998 de facto system: 23
  - 2009 de facto system: 23
  - Arrangement with no separate legal tender: 10 (1998); 10 (2009)
  - Currency board arrangement: 13 (1998); 13 (2009)
- Soft pegs (counts and subcategories):
  - Soft pegs total:
    - 1998 de facto system: 81
    - 2009 de facto system: 78
  - Conventional fixed peg vs Conventional pegged arrangement:
    - 1998: Conventional fixed peg 68
    - 2009: Conventional pegged arrangement 45
  - Stabilized arrangement (2009): 22
  - Intermediate pegs (of which):
    - 1998: 13
    - 2009: 11
  - Pegged exchange rate within horizontal bands:
    - 1998: 3
    - 2009: Pegged exchange rate within horizontal bands 3
  - Crawling peg:
    - 1998: 8
    - 2009: Crawling peg 5
  - Crawling band (1998): 2 (dropped in revised taxonomy)
  - Crawl-like arrangement (2009): 3
- Floating arrangements:
  - Floating arrangements total:
    - 1998 de facto system: 84
    - 2009 de facto system: 75
  - Managed floating / Floating / Independently floating / Free floating:
    - 1998: Managed floating 44; Independently floating 40
    - 2009: Floating 39; Free floating 36
- Other managed arrangements (residual):
  - 1998: n.a.
  - 2009: 12

- Note in source: "Information for end-April 2009 will be published in the 2009 Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), forthcoming."

### IV. Principles, Objectives, and Operational Considerations
- Underlying principles of the de facto classification:
  - capturing outcomes of actual exchange rate policies on a de facto basis rather than de jure descriptions;
  - avoiding value judgments on policy appropriateness or arrangement choice;
  - adopting a backward-looking approach describing outcomes of past policies.
- Objectives:
  - support IMF surveillance by bringing greater transparency, consistency, and evenhandedness to the description of policy outcomes;
  - help IMF staff identify institutional and operational obstacles to policy objectives;
  - provide a summary description to facilitate cross-country analysis.
- Operational design goals:
  - reflect the wide range of arrangements with no overlap among categories;
  - consistently classify countries according to transparent and verifiable rules;
  - be operationally feasible without ambiguity or unnecessary delays.
- Caveat: the classification captures basic features (notably the extent to which the exchange rate is market-determined) and should be complemented by more detailed descriptions of exchange rate policies.

### V. Need for Change: Residual Heterogeneity and Intervention Complexity
- Residual category problem:
  - Figure 1 (Development of the Residual Category, 1975–2008) shows the residual category's evolution and heterogeneity; note that for end-April 2008 the residual category was sizeable under past taxonomies.
  - Less than 10 percent of the IMF’s membership fell into the residual category at end-April 2008 under the revised taxonomy (see section on "other managed arrangements").
- Operational problems under the 1998 system:
  - the distinction between independent floating and managed floating relied too heavily on judgment;
  - many countries resisted reclassification to managed float or fixed peg, arguing no commitment to defend a particular exchange rate level.
- Intervention practices:
  - growing ability to switch between domestic and foreign currency debt on commercial terms;
  - income flows (e.g., oil) may or may not be channeled through the central bank;
  - buildup of reserve-like assets in oil stabilization funds or longer-term investment funds;
  - conventional measures of intervention may understate the degree to which some floating rates are managed;
  - lack of availability of data on foreign exchange intervention compounds problems.

### VI. The Revised De Facto Classification System: Structure and Decision Process
- Continuity retained:
  - the distinction between hard pegs, soft pegs, and floats is preserved.
- Use of de jure information:
  - whenever consistent with observed policies and outcomes, countries are classified in line with their de jure or declared exchange rate arrangements;
  - information on de jure arrangements is systematically collected as part of the AREAER exercise.
  - hard pegs (currency boards, formal dollarization), conventional fixed pegs, crawling pegs, and pegged exchange rates within horizontal bands are always and only confirmed de jure arrangements when appropriate.
- Three-step decision process (stylized in Figure 2):
  - Step 1: Distinguish between de facto arrangements that are floating (market-determined) and those that are not.
  - Step 2: Non-floating de facto arrangements are subdivided into stabilized and crawl-like; these are defined using verifiable quantitative and qualitative criteria. Stabilized arrangements can be considered peg-like for many analysis purposes.
  - Step 3: Floating arrangements are refined by identifying a subset as free floating; classification as free floating requires that specific quantitative and qualitative criteria are met.
  - Any arrangement not falling into these categories is classified as other managed arrangement (new residual category).

### VII. Criteria and Evidence for Key Classifications
- Floating criterion:
  - the exchange rate is largely market-determined;
  - observed exchange rate behavior complemented by information on monetary and foreign exchange policy actions (notably intervention) allows judgments on whether the rate is primarily market-determined or driven by official actions.
- Free floating:
  - requires that there has been no intervention over the past six months, with the exception of limited intervention to address disorderly market conditions.
  - footnote: "The definition allows for 3 instances of intervention, each lasting no more than 3 business days. Normally, disorderly market conditions last for only 1 or 2 days."
  - if IMF staff lack sufficient information/data to verify this criterion, the arrangement is classified as floating (not free floating). Thus data availability, rather than subjective judgment, plays a key role.
- Stabilized and crawl-like:
  - used where de facto and de jure arrangements differ and the exchange rate is not largely market-determined but meets statistical criteria for a soft peg.
  - terminology emphasizes a backward-looking description that avoids subjective interpretation of authorities’ intentions.
  - when statistical criteria for a soft peg are met, there is a presumption the arrangement is not floating.
- Information IMF staff may request to make judgments:
  - direct and indirect intervention, foreign exchange market turnover (spot and derivatives), reserve level and currency composition, interest rates, foreign exchange activities of public enterprises and sovereign wealth funds, debt composition and debt management policies, macroeconomic data reliability, and other relevant items.
  - consultations with country authorities play an important role.
  - in case of doubt, statistical classification criteria are determinative.

### VIII. Other Managed Arrangements (New Residual Category)
- Definition and prevalence:
  - captures countries where de facto and de jure arrangements differ, which manage exchange rates but are not floating, and which exhibit frequent or irregular policy changes.
  - as indicated in Table 1, less than 10 percent of the IMF’s membership fell into this residual category at end-April 2008.
- Operational adjustments to avoid spurious changes:
  - the usual assessment period can be lengthened by up to three months to avoid noisy reclassifications in borderline cases.

### IX. Treatment of Outliers, Spikes, and Realignments
- The "crawling band" category has been dropped due to infrequent use.
- Allowances for occasional spikes and realignments to enhance comparability:
  - allows for one episode of spikes lasting at most five days per quarter, and one step realignment in six months.
  - footnote: "Such spikes may be the result of short-term one-off exchange rate pressures or disorderly market conditions. For countries with pegged exchange rate regimes, there are very few instances where countries exceed their ±1 percent bands. The five-day period broadly corresponds to the period of one week specified for broken cross rates under the policy on Multiple Currency Practices (Decision No. 6790-(81/43), adopted 3/20/81, as amended), but the main reason for setting it relatively wide is to allow for diverging practices across countries, in that some need more time to manage disorderly conditions than others."
  - distinction between spikes (temporary) and devaluations/revaluations (which permanently move the median exchange rate) noted; current practice allows four adjustments of over 1 percent per year, which would be tightened under the revised methodology.
- Quantitative indicators:
  - used to identify a minimum absolute and relative level of market pressures to warrant conclusions about exchange rate policies from observed stability.

*Source: Staff calculations.*

### Appendix I. Revised Classification System—Definitions of Categories

### Appendix I. Revised Classification System—Definitions of Categories

### Hard pegs
- Exchange arrangement with no separate legal tender
  - Currency of another country circulates as the sole legal tender (formal dollarization).
  - Implies the complete surrender of the monetary authorities’ control over domestic monetary policy.
  - Note: effective January 1, 2007, exchange arrangements of countries that belong to a monetary or currency union in which the same legal tender is shared by the members of the union are classified under the arrangement governing the joint currency.
  - The new classification is based on the behavior of the common currency; the previous classification was based on the lack of a separate legal tender. The change is definitional only and not a judgment that there has been a substantive change in the exchange arrangement or other policies.

- Currency board arrangement
  - 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 fulfillment of the legal obligation.
  - Domestic currency issued only against foreign exchange and remains fully backed by foreign assets.
  - Eliminates traditional central bank functions such as monetary control and lender-of-last-resort, leaving little scope for discretionary monetary policy.
  - Some flexibility may still be afforded, depending on the strictness of the banking rules of the currency board arrangement.

### Soft pegs
- Conventional pegged arrangement
  - Country formally (de jure) pegs its currency at a fixed rate to another currency or a basket of currencies.
  - Anchor currency or basket weights are public or notified to the IMF.
  - Authorities stand ready to maintain the fixed parity through direct intervention or indirect intervention (e.g., interest rate policy, foreign exchange regulations, moral suasion, intervention by other public institutions).
  - No commitment to irrevocably keep the parity.
  - Formal arrangement must be confirmed empirically: the exchange rate may fluctuate within narrow margins of less than ±1% around a central rate—or the maximum and minimum value of the spot market exchange rate must remain within a narrow margin of 2%—for at least six months.

- Stabilized arrangement
  - Spot market exchange rate remains within a margin of 2% for six months or more (with the exception of a specified number of outliers or step adjustments), and is not floating.
  - Margin of stability can be met with respect to a single currency or a basket; anchor ascertained/confirmed using statistical techniques.
  - Requires that statistical criteria are met and that exchange rate remains stable as a result of official action (including structural market rigidities).
  - Does not imply a policy commitment by the country authorities.

- Crawling peg
  - Classification involves confirmation of the country authorities’ de jure exchange rate arrangement.
  - Currency adjusted in small amounts at a fixed rate or in response to changes in selected quantitative indicators (e.g., past inflation differentials vis-à-vis major trading partners or differentials between the inflation target and expected inflation in major trading partners).
  - Rate of crawl can be backward looking (generate inflation-adjusted changes) or forward looking (predetermined fixed rate and/or below projected inflation differentials).
  - Rules and parameters are public or notified to the IMF.

- Crawl-like arrangement
  - Exchange rate must remain within a narrow margin of 2% relative to a statistically identified trend for six months or more (with the exception of a specified number of outliers), and the arrangement cannot be considered floating.
  - Normally requires a minimum rate of change greater than allowed under a stabilized (peg-like) arrangement.
  - Considered crawl-like with an annualized rate of change of at least 1%, provided the exchange rate appreciates or depreciates in a sufficiently monotonic and continuous manner.

- Pegged exchange rate within horizontal bands
  - Involves confirmation of the country authorities’ de jure exchange rate arrangement.
  - Value of the currency maintained within margins of fluctuation of at least ±1% around a fixed central rate, or the margin between the maximum and minimum value of the exchange rate exceeds 2%.
  - Includes arrangements of countries in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), replaced with the ERM II on January 1, 1999, for those countries with margins of fluctuation wider than ±1%.
  - The central rate and width of the band are public or notified to the IMF.

### Floating arrangements
- Floating
  - Largely market determined, without an ascertainable or predictable path for the rate.
  - An exchange rate satisfying statistical criteria for a peg-like or crawl-like arrangement will be classified as such unless stability is clearly not the result of official actions.
  - Foreign exchange market intervention may be direct or indirect and serves to moderate the rate of change and prevent undue fluctuations.
  - Policies targeting a specific level of the exchange rate are incompatible with floating.
  - Indicators for managing the rate are broadly judgmental (e.g., balance of payments position, international reserves, parallel market developments).
  - Floating arrangements may exhibit more or less exchange rate volatility, depending on the size of the shocks affecting the economy.

- Free floating
  - Classified as free floating if intervention occurs only exceptionally, aims to address disorderly market conditions, and the authorities have provided information or data confirming that intervention has been limited to at most three instances in the previous six months, each lasting no more than three business days.
  - If the information or data required are not available to the IMF staff, the arrangement will be classified as floating.

### Residual
- Other managed arrangement
  - Residual category used when the exchange rate arrangement does not meet the criteria for any of the other categories.
  - Arrangements characterized by frequent shifts in policies may fall into this category.

---

### Appendix II. The Evolution of the IMF’s Classification Taxonomies
- 1. Bretton Woods System (July 1944–July 1971)
  - Par value: member maintains an exchange rate within ±1 percent around its par value. After 1959, cross parities of up to ±2 percent were allowed, provided each currency maintained a ±1 percent band vis-à-vis its par value. Par values vis-à-vis the U.S. dollar or gold of a certain weight and fineness.
  - Fluctuating: 18 countries adopted fluctuating arrangements for various periods.

- 2. Smithsonian realignment (December 1971–January 1974)
  - Par value: member maintains an exchange rate within ±2.25 percent around its par value or, for cross parities, ±4.5 percent. Par values vis-à-vis any member’s currency, gold, or the SDR.
  - After November 7, 1973, a member could maintain margins of up to ±2.25 percent against an intervention currency regardless of that currency’s margins or resulting cross-margins.
  - Fluctuating: some countries maintained flexible arrangements during this period.

- 3. 1975 Taxonomy (June 1975–September 1976)
  - Pegged to a single currency: exchange rate within ±2.25 percent around a central rate vis-à-vis a single currency.
  - Pegged to a composite (including the SDR): exchange rate within ±2.25 percent around a central rate vis-à-vis a basket of currencies or the SDR.
  - Floating—adjusted according to a set of indicators: exchange rate within ±2.25 percent around a central rate, authorities adjust central value based on indicators or regularly.
  - Floating—common margins: cooperative arrangement with bands of at most ±2.25 percent around a central rate vis-à-vis each-others’ currencies (a "snake").
  - Floating—independently: deviations greater than ±2.25 percent allowed.

- 4. 1977 Taxonomy (November 1976–December 1981)
  - Pegged to a single currency: exchange rate within ±2.25 percent around a central rate.
  - Pegged to a composite (including the SDR): exchange rate within ±2.25 percent around a central rate.
  - Adjusted according to a set of indicators: authorities set the rate for a specified short time interval and stand open to buy and sell foreign exchange within narrow bands around that rate.
  - Cooperative exchange arrangements: group of countries maintain exchange rates within bands of at most ±2.25 percent around a central rate (a "snake").

- 5. 1982 Taxonomy (January 1982–October 1998)
  - Pegged to a single currency: exchange rate within zero or very narrow margins seldom exceeding ±1 percent around a central rate vis-à-vis a single currency. Beginning in July 1992, fully dollarized countries included in this category.
  - Pegged to a composite (including the SDR): exchange rate within zero or very narrow margins seldom exceeding ±1 percent around a central rate vis-à-vis a basket or the SDR.
  - Flexibility limited vis-à-vis a single currency: margins of ±2.25 percent vis-à-vis another member’s currency or the SDR.
  - Flexibility limited vis-à-vis a cooperative arrangement: margins within ±2.25 percent with respect to cross-rates.
  - Adjusted according to a set of indicators: authorities set the rate for a short interval and stand open to buy and sell foreign exchange at a rate determined on the basis of certain indicators.
  - Other managed floating: flexible arrangements not covered by “adjusted according to a set of indicators” or “independently floating.”
  - Independently floating: authorities allow the exchange rate to move continuously to reflect market forces; intervention, if any, influences but does not fully neutralize the speed of movement.

- 6. De facto Classification Taxonomy (November 1998–January 2009)
  - Exchange arrangement with no separate legal tender: legislatively surrendered sole control over domestic monetary policy. Two types: (1) another currency as legal tender (may issue subsidiary units at par); and (2) currency union, with banknotes issued by and exchange rate policy determined by a multinational central bank in which the country has representation. Beginning in January 2007, countries in the second group classified based on the arrangement governing the joint currency.
  - Currency board arrangement: explicit legislative commitment to exchange domestic currency for a specified foreign currency at a specified rate, with restrictions on the issuing authority, including a backing requirement and restrictions on some typical central bank activities.
  - Conventional pegged arrangement: fixes exchange rate to an anchor within margins of less than ±1 percent. Need not be irrevocable. May be formal or de facto; de facto peg must be actively maintained for at least three months. In January 2007, observation period lengthened to 6 months.
  - Pegged exchange rate within horizontal bands: maintained within a band with range at least 2 percent (or ±1 percent around a central rate). ERM/ERM II countries included unless narrower margins explicitly maintained.
  - Crawling peg: exchange rate adjusted periodically/frequently in small amounts in response to quantitative indicators or to effect gradual devaluation/revaluation against a single currency or a basket. Exchange rate remains within margins of less than ±1 percent around a central rate. Beginning in January 2007, (1) included countries whose exchange rates remained within a sliding range of ±1 percent for at least six months as a result of intervention without an explicit commitment; and (2) arrangements where direction of crawl could change were classified as managed floating.
  - Crawling band: exchange rate adjusted in small amounts but may fluctuate in a range of ±1 percent or more or a range of 2 percent. Extremities may be symmetric or asymmetrically adjusted.
  - Managed floating with no preannounced path for the exchange rate (in 2005, "preannounced" replaced with "predetermined"): monetary authority attempts to influence the level without a specific path or target; rate essentially market determined. Indicators for managing the rate are broadly judgmental; adjustments may not be automatic. Intervention may be direct or indirect. Beginning in January 2007, arrangements with automatic adjustment that no longer qualify as crawling arrangements were classified in this group.
  - Independently floating: 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 short run rather than aiming at a level.

*Source: Appendix I and Appendix II, Revised Classification System—Definitions of Categories (IMF).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09211.pdf_