Explain the concept of a fixed exchange rate regime.

Explain the concept of a fixed exchange rate regime.

A fixed exchange rate regime is a monetary system in which the value of a country's currency is fixed or pegged to the value of another currency, a basket of currencies, or a commodity such as gold. Under this regime, the central bank of the country intervenes in the foreign exchange market to maintain the fixed exchange rate by buying or selling its own currency. This intervention helps to stabilize the exchange rate and ensures that it remains constant over a specified period. The purpose of a fixed exchange rate regime is to promote stability in international trade and investment by reducing uncertainty and minimizing exchange rate fluctuations. However, it requires a strong commitment from the central bank and may limit the ability to pursue independent monetary policies.