What is Managed Currency?

Managed currency is a currency with an exchange rate mediated by government intervention, rather than being allowed to float freely according to the supply and demand of the free market. Most currencies are managed to some extent, although the degree of management varies, depending on the government's monetary policies. Governments manage their currency to maintain economic stability both domestically and internationally, with the goal of preventing radical economic destabilization caused by the movement of free market forces.

Governments can use a variety of procedures to manage their currency. Circulation can be increased or decreased by printing more money and taking money out of circulation. Countries can also buy and sell currency in other denominations to control the exchange rate domestically; if a glut of one currency is flooding the market and destabilizing it, for example, the government may buy up this currency and hold onto it until the market levels out, and then slowly release it back onto the market. Policy in nations with managed currency balances a variety of concerns and needs for the benefit of the market.

Changes in interest rates to affect the amount of money available are another tool used by the central bank in countries with managed currency. Higher interest rates restrict lending, making it harder to get money and addressing problems like a flood of currency on the market. Lower rates increase lending and available capital and can be used to ease a credit crunch and promote liquidity. Balancing interest rates is done with care to support economic development.

Heavy government intervention tends to be frowned upon. While many people agree that governments have a right and an obligation to set and maintain monetary policy in the interests of political and economic stability, too much intervention may be viewed as a cover for financial crises. Allowing the free market some play is viewed as important for allowing a nation's economy to remain in balance. In a country with managed currency, like most nations on earth, tight government controls may frighten off foreign investors.

Open market operations undertaken by the central bank are usually fairly public in nature, as for example when interest rate changes are made and announced. Keeping government activities as transparent as possible is intended to allay concerns and allow members of the public to see how the government is approaching regulation and implementation of monetary policy. Managed currency is only one component of monetary policy and must be viewed in the context of other regulatory activities undertaken by the government.