What is the difference between fixed rate regime and floating rate?

Answer 1

Source: https://www.policyarchive.org/handle/10207/1311 I hope this is a good answer. Congress is generally interested in promoting a stable and prosperous world economy. Stable currency exchange rate regimes are a key component to stable economic growth. This report explains the difference between fixed exchange rates, floating exchange rates, and currency boards/unions, and outlines the advantages and disadvantages of each. Floating exchange rate regimes are market determined; values fluctuate with market conditions. In fixed exchange rate regimes, the central bank is dedicated to using monetary policy to maintain the exchange rate at a predetermined price. In theory, under such an arrangement, a central bank would be unable to use monetary policy to promote any other goal; in practice, there is limited leeway to pursue other goals without disrupting the exchange rate. Currency boards and currency unions, or "hard pegs," are extreme examples of a fixed exchange rate regime where the central bank is truly stripped of all its capabilities other than converting any amount of domestic currency to a foreign currency at a predetermined price.

The main economic advantages of floating exchange rates are that they leave the monetary and fiscal authorities free to pursue internal goals -- such as full employment, stable growth, and price stability -- and exchange rate adjustment often works as an automatic stabilizer to promote those goals. The main economic advantage of fixed exchange rates is that they promote international trade and investment, which can be an important source of growth in the long run, particularly for developing countries. The merits of floating compared to fixed exchange rates for any given country depends on how interdependent that country is with its neighbors. If a country's economy is highly reliant on its neighbors for trade and investment and experiences economic shocks similar to its neighbors', there is little benefit to monetary and fiscal independence, and the country is better off with a fixed exchange rate. If a country experiences unique economic shocks and is economically independent of its neighbors, a floating exchange rate can be a valuable way to promote macroeconomic stability. A political advantage of a fixed exchange rate regime, and a currency board particularly, in a country with a profligate past is that it "ties the hands" of the monetary and fiscal authorities.

Recent experience with economic crisis in Mexico, East Asia, Russia, Brazil, and Turkey suggests that fixed exchange rates can be prone to currency crises that can spill over into wider economic crises. This is a factor not considered in the earlier exchange rate literature, in part because international capital mobility plays a greater role today than it did in the past. These experiences suggest that unless a country has substantial economic interdependence with a neighbor to which it can fix its exchange rate, floating exchange rates may be a better way to promote macroeconomic stability, provided the country is willing to use its monetary and fiscal policy in a disciplined fashion. The collapse of Argentina's currency board in 2002 suggests that such arrangements do not get around the problems with fixed exchange rates, as their proponents claimed.

Answer 2

If you mean floating vs "locked"...

Locking in the interest rate is what your loan officer does when you are applying for a loan. Once you're rate is locked, that day's pricing is what you'll get.

Before locking, your rate is floating with the market, as interest rate change daily and often multiple time during the day.

If you mean a fixed rate vs and "adjustable" rate...

The interest rate on a fixed loan stays fixed throughout the life of the loan and will never change. An adjustable rate has a set margin and is tied to a particular index. FOr example, if your margin is 3%, and the index your rate is tied to is 3%, your rate is 3%. If that index rises to 3.25%, your rate will rise to 6.25%. Typically, adjustable rate mortgages (ARMs) will have a short term fixed period from 1-10 years before the rate begins to adjust. In addition, there are short term and lifetime caps on most ARMs, where your rate can't go up more than say 1% a year and 5% lifetime.