Exchange rate regime.

In plain English

An exchange rate regime is the policy framework that decides how a currency's price against other currencies gets determined. At one end, a pure float lets supply and demand in the currency market set the price minute by minute. At the other, a hard peg fixes the rate to another currency or a basket, and the central bank buys and sells reserves to hold that line. Most countries sit somewhere in between, letting the rate move inside a band or managing it quietly. The regime a country picks decides how much control it keeps over its own interest rates.

01Why it matters

The regime decides whether the price of imported goods and foreign travel drifts slowly or resets overnight, and whether a central bank can cut rates when its own economy is weak.

02The math, step by step

Say a country pegs at 8 units per dollar and traders push toward 9. The central bank sells dollars and buys its own currency to defend 8. Spend 2 billion dollars of a 20 billion dollar reserve pile in one month and the defense has burned 10 percent of the reserves in 30 days.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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