Exchange Control Methods

The various methods of exchange control may broadly be classified into two types direct and indirect. Direct methods of exchange control include those devices which are adopted by governments to have and effective control over the exchange rate while indirect methods are designed to regulate international movements of goods.

There are many ways to introduce exchange control in an economy. These are usually classified into two groups:

(i) Direct exchange control and 

(ii) Indirect exchange control

Direct methods of exchange control 

In direct exchange control certain measures are adopted which effectuate immediate direct restriction on foreign exchange from all sides its quantum use and allocation.

In general direct exchange control includes measures like.

(i) Intervention

(ii) Exchange restrictions

(iii) Exchange clearing agreements

(iv) Payments agreements and 

(v) Gold policy

Intervention: it refers to the government intervention or interference in the free working of the exchange market with a view to overvalue or undervalue the country currency in terms of foreign money.

The government or its agency the central bank can intervene in the free market by resorting to buying and selling the home currency against feeing currency in the foreign exchange market to support ro depress the exchange rate forties currency.

Pegging operations: government intervention in the foreign exchange market takes the form of pegging up or pegging down of the currency of the country to a chooses rate of exchange. Since undervaluation or overvaluation is not the equilibrium rate it has to be pegged. Thus pegging means keeping a fixed exchange value of a currency however intervention may be practiced by a government without resorting to pegging as such.

Exchange restriction: exchange restriction refers to the policy or measures adopted by a government which restrict or compulsory reduce the flow of home currency in the foreign exchange market. 

Exchange restrictions may take various forms the most common of them being (1) blocked accounts (2) multiple exchange rates.

Blocked accounts: under the condition of severe finical crisis a debtor country may adopt the scheme of blocking the accounts of its creditor in 1931, Germany for instance had done so in order to have exchange restriction blocked accounts reds to bank deposits securities and other assets held by foreigners in a country which denies then conversion of these into their home currency.

Multiple exchange rates: in the early thirties Germany had initiated the device of multiple rates as a weapon to improve her balance of payments position. Under this system different exchange rates are set for different classes and categories of exports nd imports generally a low rate low prices of foreign money in terms of demist c currency is confined to imports of necessary items having an inelastic demand while a high penalty rate is fixed for the imports of luxury items in short the multiple exchange rates system implies official price discriminatory policy in foreign exchange transactions.

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