Managed floating exchange rate is a monetary regime in which the government allows a free exchange rate movement to adjust supply and demand, while sometimes intervening in the foreign exchange market (forex market). The central bank intervenes by buying and selling currencies on the forex market.
Although it intervenes, the central bank does not commit to target exchange rates at a certain level or a specific target zone. The intervention is not intended to influence public expectations on the exchange rate instead of reducing its volatility.
A too volatile exchange rate harms the economy since it causes instability. For this reason, any sharp depreciation or appreciation requires the central bank to stabilize the exchange rate movements.
The difference between free-floating and managed floating exchange rate
Managed floating exchange rates are also known as a dirty float because the government is trying to intervene so that exchange rate volatility becomes more moderate.
That policy contrasts with the free-floating exchange rate (also known as clean float), where the exchange rate is determined only by supply and demand on the market and is without government intervention.
Advantages and disadvantages
Several central banks implement this policy, including in Indonesia. Managed floating exchange rates allow monetary policy independence. It also allows the central bank to use other policies, such as interest rates, to stabilize exchange rate movements, not just using foreign exchange reserves.
However, as in the free-floating exchange rate, this system can also trigger speculation activities, especially when foreign exchange reserves are insufficient.
