What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?

The difference between the four exchange rate systems is as follows: 1. Floating exchange rate: The value of a currency is determined by supply and demand in the foreign exchange market, with no central bank intervention. It provides flexibility in responding to economic changes (e.g., US dollar to euro exchange rate). 2. Soft peg: The currency's value can fluctuate within a certain range, but the central bank may intervene if it deviates too far from its target value. It offers a mix of flexibility and stability (e.g., Chinese yuan). 3. Hard peg: The currency's value is fixed to another currency, a basket of currencies, or a commodity, and the central bank maintains the fixed rate through intervention. It provides stability but reduces response to economic changes (e.g., Hong Kong dollar pegged to the US dollar). 4. Dollarization: A country adopts a foreign currency as its official legal tender, ensuring stability and reducing inflationary pressures but losing control over monetary policy (e.g., Ecuador adopting the US dollar).