What is an 'Exchange Rate Mechanism (ERM)'

An exchange rate mechanism is based on the concept of fixed currency exchange rate margins. However, there is variability of the currency exchange rates within the confines of the upper and lower end of the margins. This currency exchange rate mechanism is also commonly called a semi-pegged currency system.

BREAKING DOWN 'Exchange Rate Mechanism (ERM)'

The most notable exchange rate mechanism was the one that was in effect in Europe. The goal of the European Exchage Rate Mechanism was to reduce exchange rate variability and achieve monetary stability in Europe prior to the introduction of the single currency – the euro – on January 1, 1999.

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