Exchange rate regime

Businesses enjoy this certainty and pegging a currency can often lead to foreign direct investment (FDI).

[4] If a country chooses to be free-floating like the US dollar, they are monetarily independent- however they lose the exchange rate stability that fixed currencies have.

When deciding upon a currency regime countries can achieve two out of three things: full financial integration, exchange rate stability, or monetary independence.

A monetary authority may, for example, allow the exchange rate to float freely between an upper and lower bound, a price "ceiling" and "floor".

Band (or target zone) There is only a tiny variation around the fixed exchange rate against another currency, well within plus or minus 2%.

It is a type of fixed regime that has special legal and procedural rules designed to make the peg "harder—that is, more durable".

Most of the adopting countries are too small to afford the cost of running its own central bank or issuing its own currency.

Under a currency union, there is some form of transnational structure such as a single central bank or monetary authority that is accountable to the member states.