Clean
and Dirty Exchange Rate
Whenever the
Central bank of the country do not intervene in the foreign exchange markets,
in other words do not buy or sell currencies in the market, and allow the
exchange rate to be determined freely by the market forces of demand and supply
in the economy then the system is called clean exchange rate system.
Dirty exchange
rate system is also called managed floating exchange rate system where the
central bank intervenes in the foreign exchange markets by buying or selling
the foreign currencies. In such a case, the exchange rate is managed or
influenced by the intervention of the Central bank in the markets.
Depreciation
and Devaluation
The terms
devaluation and revaluation takes place under the system of fixed exchange rate
syatem. A currency is devalued whenever its price is lowered by the
central bank in terms of the foreign currency. Similarly a currency is revalued
whenever its price is raised by the central bank with respect to the foreign
currency.
On the other
and under flexible or floating exchange rates the terms used are depreciation
and appreciation. A domestic currency is said to be depreciated whenever the
foreign currency becomes more expensive in terms of domestic currency.
Similarly, a domestic currency appreciates whenever it becomes expensive in
terms of the foreign currency.
For example if
Indians have to pay more for buying a dollar then it is depreciation of Indian
rupee and when we have to pay less for buying a dollar it is appreciation of
Indian rupee.
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