General Remarks

The choice of the exchange rate system is one of the most fundamental decisions a country has to make when it wishes to enter economic relations with other countries. Since the exchange rate represents the price of one currency in terms of another (Krugman/Obstfeld, 2006, p. 306), the choice of the regime has important implications for the conduct of international trade and investment. In order to provide a good environment for economic activity at the international level, numerous states decided to fix their exchange rate in the past. (Pilbeam, 1992, p. 252) An exchange rate is typically pegged through the obligation of monetary authorities to intervene in the

foreign exchange (FE)

market, that is by standing ready to buy or sell the domestic currency for FE or precious metals at a fixed parity.