Overview of Fixed Exchange Rate Regimes

In the modern era, the traditional dichotomy between fixed and floating exchange rates in international finance appears to be too simplified to cover the broad range of exchange rate regimes lying between and beyond these two extreme cases. By classifying exchange rate regimes according to their degree of fixity in their currency peg (Stocker, 2001, p. 54), three main categories can be distinguished, as shown in

Figure 1:

the use of a foreign currency as legal tender, fixed exchange rates, and flexible exchange rates (Gärtner/Lutz, 2009, p. 299f.). If a country is experiencing high inflation and is facing great difficulties in bringing it down due to a lack of credibility of its monetary authorities, it may decide to

unilaterally take over another currency for domestic payments

.