There are two basic types of currencies which float: free and managed. Free currencies are not subject to direct government intervention and because there are literally billions of units of the money available for trade by buyers and sellers. Traders who purchased dollars one day may sell them the next for yen, and so are not tied to any particular currency for themselves or those on whose behalf they may be working.
Managed currencies are subject to intervention by their governments; such intervention is normally undertaken when the government perceives the national interest to be at stake. Governments have an interest in the value of their currencies because strong currencies make their exports more expensive and less competitive, while relatively weaker currencies improve the outlook for exports. Since global trade is now the norm, maintaining a strong export trade is particularly important to most governments (Erlanger, 1995, p. C7).
Some managed currencies are managed within a "band;" the currencies float within a predetermined price range (the band), but the government will intervene to prevent the currency from either rising or falling outside the band's parameters. These are sometimes referred to as "dirty floats" (Epstein, 1999, p.ß7). This highly specialized form of managed currency has found particular favor among developing nations as a way to balance the advantages of fixed currencies with the advantages of floating currencies ("The Fixed and the Flexible," 1996, p. 76).
Flexible exchange rates first found favor among industrial countries in the early 1970s; the determination of the exchange rate arrangement and the choice of the currency "peg" (measure) became major policy issues for developing countries (Rothbard, 1994, p. 8A). This question took on more urgency in 1973 with the first oil price shock, and became important again in 1982 as the debt crisis began to unfold. Meanwhile, increasing numbers ...