At one time the IMF was in charge of supervising one predominant system of fixed exchange rates. Currently, the Fund cannot tell member countries what exchange rate system to adopt, as this would contravene the Jamaica Accord. Rather, the Fund reports the exchange rate arrangements followed by each member country, which is obliged to inform the IMF of any change in its exchange rate arrangement. The problem here is that countries do not necessarily practise what they declare, in the sense that the actual exchange rate arrangement they follow is not the same as the declared one. This has led to the emergence of a strand of the literature dealing with exchange rate regime verification, distinguishing between de facto and de jure regimes (for details, see Moosa 2005). For example, in July 2005, China declared that it was moving from a single peg to a basket peg but, at least in the immediate period, the exchange rate of the yuan behaved more like a crawling peg (see, e.g., Moosa et al. 2009; Moosa and Li 2017). The following are the exchange rate regimes used under the present system of “national preference”.
Exchange Arrangements with No Separate Legal Tender
Under this arrangement, the currency of another country circulates as the sole legal tender. Alternatively, the country belongs to a monetary or currency union in which the same legal tender is shared by members of the union. This includes the countries using the euro and members of other currency unions (e.g., Grenada is part of the East Caribbean Currency Union).
A currency board is an arrangement that is based on an explicit legislative commitment to exchange the domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfilment of its legal obligation.
Other Conventional Fixed Peg Arrangements
These arrangements include pegging to a single currency and pegging to a basket of currencies, such as the SDR. Under these arrangements, the country pegs its currency (formally or de facto) at a fixed rate to a single currency or a basket of currencies, allowing the actual exchange rate to fluctuate within a narrow margin of less than ±1% around a central rate (the rate determined by the arrangement).
Pegged Exchange Rates with Horizontal Bands
This arrangement is similar to the previous one, except that the band within which the exchange rate is allowed to fluctuate is wider than ±1%.
Under a crawling peg, the exchange rate is adjusted periodically at a fixed, pre-announced small rate or in response to changes in some quantitative indicators (e.g., inflation).
Exchange Rates with Crawling Bands
An arrangement of crawling bands requires the exchange rate to be maintained within a certain band around a central rate that is adjusted periodically at a fixed, pre-announced rate or in response to changes in some indicators.
Managed Floating with No Pre-announced Path for the Exchange Rate
Under this arrangement, the exchange rate is determined by market forces but the monetary authority intervenes actively in the foreign exchange market without specifying a path for the exchange rate.
Under independent floating the exchange rate is determined by market forces. Any intervention in the foreign exchange market aims at curbing exchange rate volatility.