What is the difference between “clean” float and “dirty” float?
The Correct Answer and Explanation is:
Correct Answer:
A “clean” float refers to a floating exchange rate system where a country’s currency value is determined purely by market forces—supply and demand—without any government or central bank intervention.
A “dirty” float, also known as a managed float, occurs when a country allows its currency to float in the market but intervenes occasionally (by buying or selling currency) to stabilize or influence the exchange rate.
Explanation:
In the global financial system, countries adopt different exchange rate regimes to manage their currencies in relation to others. Two key types of floating exchange rate systems are clean float and dirty float.
A clean float, also known as a pure float, is a currency system where the exchange rate is determined entirely by the open market. The value of the currency fluctuates based on the forces of supply and demand without any government or central bank interference. This system promotes market efficiency, as prices reflect real economic conditions. Countries like the United States and the United Kingdom generally follow a clean float system, though even they may rarely intervene under extreme circumstances.
In contrast, a dirty float or managed float allows currency values to be influenced by the market, but with occasional or strategic government or central bank intervention. Authorities may step in to stabilize the currency, control inflation, support export competitiveness, or respond to speculative attacks. For example, a central bank might buy its own currency to prevent it from depreciating too much or sell it to avoid excessive appreciation.
The choice between clean and dirty float depends on a country’s economic goals and market maturity. A clean float can lead to high volatility, which might be harmful to developing economies. A dirty float provides more stability, but can distort true market signals and lead to inefficiencies.
In summary, the main difference lies in the level of government intervention. A clean float is free from it, while a dirty float includes it, giving policymakers more control over currency stability.
