IMF classifies member countries into the following categories according to the exchange rate regime they have adopted.
(1).Exchange Arrangements with no Separate Legal Tender
Under this regime a country either adopts the currency of another country as its legal tender or a group of countries share a common currency. Examples of the former arrangement are countries
like Ecuador and Panama which have adopted the US dollar as their legal tender. The most prominent example of the latter category is of course the European Union the sixteen member countries of which all have Euro as their currency. In addition, a few countries which are not part of the European Union have also adopted Euro as their currency. Countries belonging to the West African Economic and Monetary Union (WAEMU) such as Niger, Mali, Senegal and those belonging to the Central African Economic and Monetary Community (CAEMU) such as Cameroon, Chad, Republic of Congo share a common currency called CFA Franc. Countries belonging to the Eastern Caribbean Currency Union (ECCU) such as Antigua and Barbuda, Grenada also have a common currency called East Caribbean dollar which in turn is pegged to the US dollar in a currency board arrangement (see below). Obviously a country adopting such a regime cannot have an independent monetary policy since its money supply is tied to the money supply of the country whose currency it has adopted or controlled by a common central bank which regulates monetary policy in all the member countries belonging to the currency union.
(2). Currency Board Arrangements
A regime under which there is a legislative commitment to exchange the domestic currency against a specified foreign currency at a fixed exchange rate coupled with restrictions on the monetary authority to ensure that this commitment will be honoured. This implies constraints on the ability of the monetary authority to manipulate domestic money supply. In its classificationfor 2006 IMF classified seven countries — Bosnia and Herzegovina, Brunei, Bulgaria, Djibouti, Estonia, HongKong and Lithuania — as having a currency board system. Of these, Estonia has recently joined the European Union and adopted Euro as its currency. However Hanke (2002) argues that none of these countries can be said to conform to all the criteria of an orthodox currency board system. According to him, legislative commitment to convert home currency into a foreign currency at a fixed rate is just one of the six characteristics of an orthodox currency board arrangement. Once again, a country with a currency board arrangement cannot have an independent monetary policy.
(3) Conventional Fixed Peg Arrangements
This is identical to the Bretton Woods system where a country pegs its currency to another or to a basket of currencies with a band of variation not exceeding ± 1% around the central parity. The peg is adjustable at the discretion of the domestic authorities. Forty nine IMF members had this regime as of 2006. Of these, forty four had pegged their currencies to a single currency and the rest to a basket. A country can use a basket such as SDR or construct a basket consisting of currencies of countries which are its major trading partners.
(4) Pegged Exchange Rates within Horizontal Bands
Here there is a peg but variation is permitted within wider bands. It can be interpreted as a sort of compromise between a fixed peg and a floating exchange rate. Six countries had such wider band regimes in 2006.
(5) Crawling Peg
This is another variant of a limited flexibility regime. The currency is pegged to another currency or a basket but the peg is periodically adjusted. The adjustments may be pre-announced and according to a well specified criterion or discretionary in response to changes in selected quantitative indicators such as inflation rate differentials. Five countries were under such a regime in 2006.
(6) Crawling Bands
In this case, the currency is pegged, but the rate is enabled to rise and fall within a band around the peg and the bands are periodically moved up or down. This is done at regular intervals and the extent of fluctuation in rates depends on the situation in the economy.
(7) Managed Floating with no Pre-announced Path for the Exchange Rate
The central bank influences or attempts to influence the exchange rate by means of active intervention in the foreign exchange market — buying or selling foreign currency against the home currency — without any commitment to maintain the rate at any particular level or keep it on any pre-announced trajectory. Fifty three countries including India were classified as belonging to this group in 2006.
(8) Independently Floating
The exchange rate is market determined with central bank intervening only to moderate the speed of change and to prevent excessive fluctuations but not attempting to maintain it at or drive it towards any particular level. In 2008, a little over one-fifth of the member countries of IMF characterized themselves as independent floaters. It is evident from this that unlike in the pre-1973 years, one cannot characterize the international monetary regime with a single label. A wide variety of arrangements exist and countries move from one category to another at their discretion. This has prompted some analysts to call it the international monetary “nonsystem”.
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