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Globalization makes countries and economies interact more frequently in many aspects，including in money market.Every economy should choose how to manage its currency in relation to other currencies.The way an economy manages its currency in relation to other currencies and the foreign exchange market is called the exchange rate regime（exchange rate system/exchange rate arrangement）.The Exchange rate regime can affect one country’s macroeconomic performance（inflation，economic growth，susceptibility to crises）and it contributes to the stability of the international monetary system.Common exchange rate regimes include floating，fixed and pegged rates.
Most countries nowadays choose exchange rate regime that is between floating exchange and fixed exchange rate.
The exchange rate regime is highly related with monetary policy，which is main factor for money price determination.Specifically，money has two prices：interest rate and exchange rate.The changes of economy can affect both prices.As one of the key macroeconomic policies，monetary policy can affect interest rate hence exchange rate regime.
It is believed that the world economy has experienced several exchange rate regimes.The International Monetary Fund（IMF）has initially classified the exchange rate regimes into 8 categories according to the degree of flexibility of the arrangement
.They are：
（1）exchange arrangements with no separate legal tender.
（2）currency board arrangements.
（3）conventional fixed peg arrangements.
（4）pegged exchange rates within horizontal bands.
（5）crawling pegs.
（6）exchange rates within crawling bands.
（7）managed floating with no predetermined path for the exchange rates.
（8）independent floating.
In 2009，IMF has revised the above classification and has put the exchange rate regimes into 4 main categories：hard pegs，soft pegs，floating，and residual.Under each category，there are more detailed types as shown below：
1） Hard Pegs
（1）Exchange Arrangement with No Separate Legal Tender
Under this arrangement，one country puts it in law that it chooses another country's currency as its national currency.Ecuador in Jan.2000，for example，officially replaced its national currency，the Ecuadorian sucre，with the US dollar（a policy called dollarization）.By adopting such an arrangement，Ecuador can benefit from the currency issuing country's（the U.S.）economic stability but with the cost of monetary sovereignty.This arrangement is not always beneficial though，Argentina's hard peg turned out to be a failure and has collapsed in 2002.
（2）Currency Board Arrangement
A currency board arrangement is a monetary 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 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.Initiated by the UK since 1849，currency board arrangement once was adopted by more than 70 countries in 1940's.Nowadays，some flexibility may be afforded，depending on the strictness of the banking rules of the currency board arrangement.
2） Soft Pegs
（1）Conventional Pegged Arrangement
For classification as a conventional pegged arrangement，the country formally pegs its currency at a fixed rate to another currency or a basket of currencies，where the basket is formed，for example，from the currencies of major trading or financial partners，and weights reflect the geographic distribution of trade，services，or capital flows.The anchor currency or basket weights are publicly notified.The country authorities stand ready to maintain the fixed parity through direct intervention（i.e.，via sale or purchase of foreign exchange in the market）or indirect intervention（e.g.，via exchange rate related use of interest rate policy，imposition of foreign exchange regulations，exercise of moral suasion that constrains foreign exchange activity，or intervention by other public institutions）.There is no commitment to irrevocably keep the parity，but the 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 6 months.
（2）Stabilized Arrangement
Classification as a stabilized arrangement entails a spot market exchange rate that remains within a margin of 2％ for 6 months or more（with the exception of a specified number of outliers or step adjustments），and is not floating.The required margin of stability can be met either with respect to a single currency or a basket of currencies，where the anchor currency or the basket is ascertained or confirmed using statistical techniques.Classification as a stabilized arrangement requires that the statistical criteria are met，and that the exchange rate remains stable as a result of official action（including structural market rigidities）.The classification does not imply a policy commitment on the part of the country authorities.
（3）Crawling Peg
Classification as a crawling peg involves the confirmation of the country authorities' de jure exchange rate arrangement.The currency is adjusted in small amounts at a fixed rate or in response to changes in selected quantitative indicators，such as past inflation differentials vis-à-vis major trading partners or differentials between the inflation target and expected inflation in major trading partners.The rate of crawl can be set to generate inflation-adjusted changes in the exchange rate（backward looking）or set at a predetermined fixed rate and /or below the projected inflation differentials（forward looking）.The rules and parameters of the arrangement are public.
（4）Crawl-like Arrangement
For classification as a crawl-like arrangement，the exchange rate must remain within a narrow margin of 2％ relative to a statistically identified trend for 6 months or more（with the exception of a specified number of outliers），and the exchange rate arrangement cannot be considered as floating.Normally，a minimum rate of change greater than allowed under a stabilized（peg-like）arrangement is required.However，an arrangement will be considered crawl-like with an annualized rate of change of at least 1％，provided that the exchange rate appreciates or depreciates in a sufficiently monotonic and continuous manner.
（5）Pegged Exchange Rate within Horizontal Bands
Classification as a pegged exchange rate within horizontal bands involves the confirmation of the country authorities' de jure exchange rate arrangement.The value of the currency is maintained within certain 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％.It includes arrangements of countries in the Exchange Rate Mechanism（ERM）of the European Monetary System（EMS），which was replaced with the ERM Ⅱ on 1st Jan.1999，for those countries with margins of fluctuation wider than±1％.The central rate and width of the band are public.
3） Floating Arrangements
（1）Floating
A floating exchange rate is largely market determined，without an ascertainable or predictable path for the rate.In particular，an exchange rate that satisfies the statistical criteria for a peg-like or a crawl-like arrangement will be classified as such unless it is clear that the stability of the exchange rate is not the result of official actions.Foreign exchange market intervention may be either direct or indirect，and serves to moderate the rate of change and prevent undue fluctuations in the exchange rate.But 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.
（2）Free Floating
A floating exchange rate can be classified as free floating if intervention occurs only exceptionally，aims to address disorderly market conditions，and if the authorities have provided information or data confirming that intervention has been limited to at most three instances in the previous 6 months，each lasting no more than 3 business days.If the information or data required are not available，the arrangement is not free floating，but floating.
4） Residual
When the exchange rate arrangement does not meet the criteria for any of the other categories，it is classified as residual.Arrangements characterized by frequent shifts in policies may fall into this category.
The given exchange rate regimes have many subtle varieties in between，and thus countries with the same exchange rate regime may differ widely if central banks have different international reserves and interest rates.This explains why in reality there are no two countries have exactly the same exchange rate regime，nor is there any exchange rate regime that is suitable for all countries or at all times.Central banks need to find the most suitable one for their countries by balancing between the monetary autonomy and exchange rate stability due to the impossible trinity.
Very few countries apply absolute floating exchange rate.Even the most frequently traded currencies are not 100％ pure floating，as central banks intervene to avoid excessive fluctuation of the exchange rate.The most common exchange rate regime today is called a managed float or a dirty float.For example，the dollar，Euro，British pound and Japanese yen all are managed floating currencies.
Pegged floating currencies are relatively fixed to some currencies or one currency，only periodically adjusted.The well-known case is that after World War Ⅱ the United States pegged the dollar to gold（＄35.00 was equal to one ounce of gold），and most other countries had pegged their currencies to the US dollar.China has also gone through pegged floating（1955 1970 and 1995 2005）as Figure 1-1 indicates.
Meanwhile，the choice of foreign exchange rate regimes can influence or determine how the exchange rate between two currencies moves and fluctuates in foreign exchange market.For example，there is little sense to study the market force for the sake of exchange rate determination under pegged floating exchange rate regime.
Evolution of exchange rate regime is generally summed into 4 stages：
1） Exchange Rate Regimes when Money Is Based on a Metallic Standard
If money has an intrinsic value，i.e.money value is based on a precious metal，it leads to a fixed exchange rate system.For most of human history，money was based on some variation of a metallic standard.The last period with such a standard（called reserve currency standard）ended in 1971.One of the challenges of a metallic standard is that it does not allow countries to conduct independent monetary policies.It is a kind of fixed exchange rate.
2） Exchange Rate Regimes when Money Is Fiat
Fiat currency has no intrinsic value and does not lead to a specific exchange rate regime.Under countries have autonomy to choose their exchange rate regime.When the last metallic standard period ended in 1971，money in all countries was fiat money.Nowadays，many developed countries choose flexible exchange rate regimes where the value of currencies is decided in foreign exchange markets with minimum interventions based on the demand for and supply of currencies.
3） Pegged Regimes and Their Purposes in a Fiat Currency System
Since 1971，most developing countries have adopted a variety of pegged exchange rate regimes.One of the important factors that affect the type of the pegged regime is the extent to which the pegged regime can exercise control over monetary policy.Hard pegs such as currency board and dollarization do not provide as much monetary autonomy as soft pegs do.While hard pegs are used to signal stability，soft pegs can serve to make exports or imports cheaper or to attract foreign investors.Although pegged regimes provide a balance between fixed and free floats，they are susceptible to exchange rate overvaluation，which hurts competitiveness and undermines growth performance.
4） Optimum Currency Area
The concept of the optimum currency area shows that under certain circumstances it would be more efficient to have a common currency in a region.The term optimum implies the requirements for an efficiency-enhancing common currency.Countries in the common-currency region should experience similar economic shocks and have labor mobility among them.Despite benefits，a common currency requires a strong monetary policy coordination as well as fiscal policy coordination.
So far，there is no optimum area.Euro Zone is not an optimum area yet.
All exchange rate regimes offer benefits with cost.The table below provides a summary of the cost and benefit associated with various exchange rate regimes.
Table 1-1 Comparison of Exchange Rate Regimes
The exchange-rate regime is often seen as constrained by the monetary policy trilemma，which imposes a tradeoff among exchange stability，monetary independence，and capital market openness
.It is necessary to know more about international monetary systems for a country in order to choose the most suitable exchange rate regime.