An exchange rate can be defined as a price of one country’s currency in terms of another currency. Exchange rate regime refers to the system through which this price is determined and it is one of the most important policy instruments of governments. The choice of exchange rate regime has considerable impact on trade in goods and services, capital flows, inflation, balance of payments and other macroeconomic variables. For this reason, the choice of an appropriate exchange rate regime is a principal component of economic management in maintaining growth and stability. However, there is no consensus on how to select an appropriate exchange rate regime and there is not an ideal exchange rate regime suitable for all countries.

Specific country characteristics, policymakers’ preferences, credibility of institutions and policymakers can influence the choice of regime. Most important factors influencing the decision are size and openness of the country to trade and financial flows, stage of economic and financial development, structure of trade and production, inflation records and the type of shocks the country faces. Once the decision is taken, a supportive policy environment, which includes prudent macroeconomic policies, consistent monetary policies and credible institutions, is needed for the exchange rate regime to maintain a stable and competitive exchange rate. In the presence of inconsistent policies and fiscal imbalances, crisis would be inevitable under any exchange rate regime.

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Exchange Rate Regimes in the OIC Member Countries (English)