Does the UK have a fixed or floating exchange rate system?

RogueTrader

15

Or a mixture of both? Just an issue I need to clear up before synoptic exam. Cheers

Reply 1

ourvelocity

Since August 1992 Britain has adopted a floating exchange rate system. The Bank of England does not actively intervene in the currency markets to achieve a desired exchange rate level.

Taken from tutor2u...http://www.tutor2u.net/economics/content/topics/exchangerates/fixed_floating.htm

Reply 2

RogueTrader

OP

15

If this is true, then how come the UK has a large balance of payments defecit? A floating exchange rate is supposed to eliminate defecits through currency movements. Or is it just down to inelastic demand for certain goods or time lags? But even then, wouldnt this put huge downward pressure on our currency (which there doesnt appear to be as the pound is strong)?

Reply 3

xX_JIMI_Xx

6

i think, but i might be wrong, that the system we have is a 'dirty float'

this means that the system is a floating ER system, but the BoE buys/sells quantities of other currencies to influence the price of the pound.

however i dont think this ties in with what ourvelocity said so i could be wrong.

Reply 4

cuctacuctac

RogueTrader

If this is true, then how come the UK has a large balance of payments defecit? A floating exchange rate is supposed to eliminate defecits through currency movements. Or is it just down to inelastic demand for certain goods or time lags? But even then, wouldnt this put huge downward pressure on our currency (which there doesnt appear to be as the pound is strong)?

I suppose it's true if foreign exchange are sold and bought for the purchasing purpose only. But there is something called 'speculation', who buy and sell currency to make money out of it.

Reply 5

ourvelocity

xX_JIMI_Xx

i think, but i might be wrong, that the system we have is a 'dirty float'

this means that the system is a floating ER system, but the BoE buys/sells quantities of other currencies to influence the price of the pound.

however i dont think this ties in with what ourvelocity said so i could be wrong.

hmmm, im a bit confused now too...the information i gave was not from my own knowledge. I was curious about the answer when i read the question and so thought that i would do my own research, seen as though i will be taking the same exam in the summer. Hopefully someone can come along, definite about the answer and put us along the right lines. :confused:

Reply 6

RogueTrader

OP

15

Ive been looking through the oxford revision guide, and it mentions a 'managed exchange rate system' which I would now guess is what we have. This is where the government intervenes on occasions to influence exchange rates, but never fixes it. So its predominantly a free floating, market determined system, but the government can use reserves to influence it if it is hindering other macro economic policies.

Reply 7

Inflation

19

Yeah but I think at A-Level standard, we can assume it is completely floating?
What does the spec. say?

Reply 8

xX_JIMI_Xx

6

Inflation

Yeah but I think at A-Level standard, we can assume it is completely floating?
What does the spec. say?

i would say yea assume its completely floating, but its worth mentioning other ER systems (and there are others in the spec) in particular adjustable peg and fixed systems. the dirty float system is just a floating system with the 'unofficial' intervention of buying and selling massive quantities of currency to influence the price.

Does the UK have a fixed or floating exchange rate system?

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