Exchange Rate Regimes:

There are basically two types of exchange rate regimes viz fixed and flexible regimes. (a) Fixed Exchange Rate Regime

In a fixed exchange rate regime, the external value a country's currency is determined by explicit government policy and fixed at a certain amount of the domestic currency per unit of foreign currency.

Periodic changes in the exchange rate by government are described as devaluation or revaluation Devaluation refers to the deliberate reduction in the external value of a domestic currency. On the other hand, revaluation is a deliberate increase in the value of a country's currency relative to other currencies.

The main advantages of fixed exchange rate are: (i)It removes the uncertainty associated with the flexible exchange rate regime and brings stability. (ii) It also indirectly imposes some anti inflationary discipline on policy makers since there is need to maintain and defend the exchange rate.

In contrast, the main disadvantages are that the currency may stay overvalued or under valued: may create a parallel foreign exchange market referred to as black market.