Flexible Rate Exchange:

The flexible exchange rate also known as floating exchange rate is an exchange rate regime in which the value of a currency keeps on fluctuating in accordance with the demand and supply for the currency in the foreign exchange market. The floating exchange rate is the opposite of the fixed exchange rate. Some economists are of the opinion that a floating exchange rate is better than a fixed exchange rate as flexible exchange rates are more adept at absorbing the aftereffects of critical financial crises.

In some countries the value of the national currency is determined by the movements of the foreign exchange market. Sometimes, if there is a situation where the economic balance is found to be disturbed, the central bank of the particular country comes intervenes in the situation and the floating rate is somehow kept operational. This is known as a managed float. In situations like this, the bank fixes a lower and an upper limit between which the exchange rate can move. They either buy or sell significant amounts of foreign exchange reserves in order to provide a certain amount of support to the domestic currencies. However, the chances of such occurrences are very low. The flexible or floating exchange rate is also known to be self correcting. If there is any imbalance between the demand and supply, the floating exchange rate will adjust itself with the market conditions. However floating exchange rates have certain negative aspects. This exchange rate increases the levels of volatility in the foreign exchange scenario, which can have an adverse impact on the economic state of countries and this is especially applicable for those countries with developing economies. If the liabilities of a country are denominated in a foreign currency and the properties are in domestic currency, any unaccounted degradation in the value of the domestic currency could possibly destabilize the economy as it can lead to a severe financial crisis.