Fixed currency exchange rate

A fixed currency exchange rate means that a country has tied the exchange rate to the exchange rate of another or several other countries currencies.

A fixed exchange rate against the USD at 10 SEK/USD means that it always will cost 10 Swedish crowns to buy a USD. A fixed exchange rate can be changed by doing a revaluation or a devaluation. One benefit of a fixed exchange rate is that trade between the countries becomes easier.

Disadvantages of a fixed exchange rate is that countries will find it difficult to run their own fiscal policy and monetary policy, interest rates and inflation must be equal in the countries with fixed exchange rate. If it is higher inflation in one country than in the other country, it becomes difficult to export goods to the country that have lower inflation. Fixed exchange rates can therefore lead to recessions unless inflation is kept in check.