Understanding Managed Floating Exchange Rates: Central Bank Intervention for Currency Stability

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A managed floating exchange rate referred to as dirty float is an exchange rate regime where the value of a currency is neither purely free-floating nor fixed. Instead, its worth is mntned within a certn range relative to another currency or a portfolio of currencies through central bank intervention. The most notable example of this system has been China's currency regime in recent times. At the beginning of each trading day, China’s central bank establishes a 'reference rate', agnst which the renminbi can fluctuate up to 2 more or less than USD within onshore trading activities.

The managed floating exchange rate enables the central bank to set an exchange rate band, thus preventing situations of currency overvaluation or undervaluation. For its effectiveness and believability, a managed floating exchange rate requires an autonomous or semi-autonomous central bank with substantial foreign exchange reserves, strong credibility. The target range for this rate should not be excessively divergent from market-based levels.

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