Fixed exchange rate
Refers to the exchange rate at which the exchange rate of one country's currency to another country's currency is basically fixed.
During the gold standard period from the early 19th century to the 1930s, the international monetary system centered on the US dollar after World War II and the early 1970s all implemented a fixed exchange rate system. A fixed exchange rate does not mean that the exchange rate is completely fixed, but fluctuates around a relatively fixed upper and lower parity range. For example, in the fixed exchange rate system centered on the US dollar after World War II, the official exchange rate of the currencies of the member countries of the International Monetary Fund against the US dollar is the parity. The currency exchange rates of the member countries can only fluctuate 1% above and below the parity, and the central bank intervenes.
Floating exchange rate
Refers to the exchange rate of a country's currency to another country's currency without upper and lower limits, and is determined by the supply and demand relationship in the foreign exchange market. On August 15, 1971, the United States implemented the New Economic Policy, allowing the US dollar exchange rate to float freely. By 1973, various countries generally implemented a floating exchange rate system. It was also from that time that the foreign exchange market continued to develop with the continuous fluctuation of various exchange rates.
Floating exchange rates are divided into "free floating exchange rates" and "managed floating exchange rates" according to whether the government intervenes. In real life, the government does not take any intervention measures in the exchange rate of its own currency, and there are few countries that fully adopt a free floating exchange rate. Since the exchange rate has a significant impact on the country’s international balance of payments and economic equilibrium, governments in various countries mostly control the direction of exchange rates by adjusting interest rates, buying and selling foreign exchange in the foreign exchange market, and controlling capital movements.