Difference between Fixed and Flexible Exchange rates

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What is the difference between Fixed and Flexible Exchange rates?

Basis	Fixed exchange rate	Flexible exchange rate
meaning	A fixed exchange rate is a rate which is maintained and controlled by the central government	A Flexible exchange rate is a rate which is determined by the market force.
Controlled by	A fixed exchange rate is controlled by an apex bank or a monetary authority.	A flexible exchange rate is controlled by the demand and supply forces.
How it affects currency	A fixed exchange rate has a devaluation and evaluation in a currency.	A flexible exchange rate can depreciate and appreciate the value of a currency.
Hedging	There is no hedging risk if the country is using fixed exchange rate.	Hedging is used to reduce the currency risks in the flexible
Self adjusting mechanism	Operates through variation in supply of money, domestic interest rate and price.	Operates to remove external instability by change in forex rate.

As both the exchange rate system have their positive and negative aspects. It is not possible for economists to reach a particular conclusion, so the debate is indecisive, as counter arguments keep coming from both regimes. While theoreticians are favours flexible exchange rate due to their reliance on the free market system and price mechanism, policy makers, and central bankers supported fixed exchange rate system.

Important Link

• Kinds of Disequilibrium in Balance of payments (BOP)
• Measures Adopted by Government of India to Correct its Adverse BOP
• Balance of Payments: Meaning, Definitions, Characteristics and Uses
• Different Terms of Payment used in Foreign Trade
• Characteristics of Export Documents
• Letter of Credit: Meaning, Importance and Required Document
• Documents used in export trade its types and contents
• Restrictions on deposits to foreign currency accounts
• What is the obligation to submit foreign currency?
• Foreign Exchange: Concept, Example and Needs

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