ABSTRACT
The United States and a number of other countries maintain what are commonly called “dirty” or managed floating exchange rates. No parity is maintained, but foreign exchange reserves do move when central banks engage in foreign exchange transactions because they are displeased with the direction or speed of exchange rate movements. If, for example, a currency is declining in the exchange market, that country’s central bank may sell foreign exchange and purchase the local currency to stop or slow its fall. As a result, foreign exchange reserves decline despite the existence of a floating exchange rate. Some developing countries claim to be maintaining a floating exchange rate, but actually manage it so aggressively as to produce something very similar to a fixed parity.
