Question

What is the role of a central bank in floating exchange rate and managed floating rate?

Answer 1

The role of the Central Bank in keeping up with the foreign trade rates under various systems is

• Fixed exchange rate framework: A Central Bank effectively utilizes its foreign cash reserves to keep up with the determined exchange rate.

• Floating exchange rate framework: A Central Bank doesn’t keep up with any reserves of foreign cash as the market naturally acclimates to decide the market-driven swapping rates.

• Managed Floating: A Central Bank enters the foreign trade market to purchase/offer foreign cash to control volatility and instability in the market.

Also see: Managed Floating Exchange Rate System