In an increasingly globalized world, the way a country manages its exchange rate regime directly impacts its external competitiveness, inflation levels, investment attractiveness, and the confidence of economic agents.
Two opposing models coexist on the global stage: the floating exchange rate regime, in which the value of the currency is determined by market forces, and the fixed or pegged exchange rate regime, where a currency is tied to a reference currency such as the US dollar, maintaining a stable parity managed by monetary authorities. Both systems have advantages and vulnerabilities, and the choice depends on economic priorities, structural characteristics, and the institutional maturity of each country.
In floating exchange rate regimes, such as in the United Kingdom, the exchange rate is defined by the dynamics of supply and demand in the international market. This approach allows for greater absorption of external shocks, functioning as a safety valve that avoids direct pressure on public finances. The UK formally adopted this regime in the 1970s, after the collapse of the Bretton Woods system.
A paradigmatic episode was “Black Wednesday” in 1992, when the UK was forced to withdraw from the European Exchange Rate Mechanism (ERM) due to market pressure and the inability to maintain the pound’s parity with the German mark. Since then, the currency has floated freely, giving greater autonomy to national monetary policy.
One of the key advantages of this model lies in monetary policy independence. The Bank of England can set interest rates based on the domestic economic outlook—namely inflation, growth, and employment—without the obligation to maintain a pre-established exchange rate. This autonomy proved crucial during recent events such as the 2008 financial crisis, the post-Brexit referendum period, and the COVID-19 pandemic response. However, the floating regime is subject to greater volatility. The significant depreciation of the pound following the 2016 referendum illustrates how political factors and confidence levels can abruptly affect the currency’s value, with repercussions for prices, trade, and investment.
In contrast, pegged exchange rate regimes aim to ensure predictability and monetary stability. In these cases, the value of the local currency is fixed or maintained within a band relative to the dollar, usually through central bank interventions.
A well-established example is Hong Kong, where since 1983, the exchange rate has been tightly pegged to the US dollar under a currency board system, supported by substantial international reserves. This system facilitates foreign trade, increases investor confidence, and serves as a nominal anchor in the fight against inflation—especially in economies with a history of instability.
However, this stability comes at the cost of monetary sovereignty. Countries that adopt this regime become dependent on the US Federal Reserve’s monetary policy, even when their domestic needs differ. They are also more exposed to external shocks and speculative attacks. Argentina’s experience in the 1990s is illustrative: by adopting a 1:1 convertibility between the peso and the dollar, the country managed to control inflation but lost its ability to adjust during subsequent crises. The system’s rigidity contributed to the economic collapse of 2001, with severe social consequences.
Mozambique, on the other hand, adopts a managed floating exchange rate regime, in which the metical’s value is determined by market forces but subject to occasional intervention by the Bank of Mozambique. These interventions aim to mitigate excessive fluctuations, contain speculative pressures, and preserve macroeconomic stability. This regime, introduced in the context of the 1990s economic reforms, allows for some exchange rate flexibility, making it more adaptable to Mozambique’s external vulnerabilities. Although the foreign exchange market is relatively liberalized, the central bank continues to intervene actively—especially in the face of external shocks or inflationary pressures. The effectiveness of this regime depends on maintaining adequate international reserves, which are essential to sustain the credibility of interventions. Given the Mozambican economy’s high external exposure and strong reliance on natural resource exports and imports, the managed float offers a balanced combination of flexibility and control, tailored to the country’s structural characteristics.
These examples show that the choice between a floating and a fixed exchange rate should not be seen as a purely technical decision, but rather as part of a comprehensive economic strategy. Factors such as the size of the economy, trade openness, institutional robustness, and fiscal discipline play a critical role in the effectiveness of the chosen regime. More developed economies with deep financial markets, like the UK, tend to benefit from the flexibility of a floating regime. On the other hand, more vulnerable economies or those with a history of monetary instability, like Mozambique, may opt for fixed regimes to reinforce credibility and attract capital, provided they can maintain adequate reserves and implement prudent fiscal policies.
Ultimately, more important than the type of exchange rate regime is the coherence and credibility of the broader economic policy. A fixed regime does not eliminate the need for sound fiscal governance, just as a floating regime does not guarantee stability without competent monetary management. Confidence in a currency, whether floating or pegged, depends on the quality of institutions and the consistency of economic policy decisions.
