Dirty float refers to a specific floating exchange rate system in which central bank intervention may occur. The country’s central bank may do so with the objective of manipulating the currency in order to protect it from effects of economic fluctuation. This is especially helpful in ensuring that major backlashes are prevented before they can even occur.
A floating exchange rate is one in which the value of a particular currency, in this case known as a floating currency, is allowed to change depending on fluctuations in the foreign exchange market.
Since floating exchange rates are directly affected by changes on an international level, adjustments are automatically made to the currency. These adjustments are often believed to be beneficial, because they help protect the currency from external shocks.
On the other hand, adopting a fixed exchange rate may seem attractive, because doing so may appear to bring about more stability. A country must therefore make a decision on which regime to use, especially since most countries would prefer to be able to keep their currencies strong in relation to those of other nations. In order to do so, it are necessary to opt for a floating rate, albeit one which is still open to intervention.
Dirty float is alternatively known as a managed float. In such a regime, one of the techniques a country’s central bank may use is the purchase and sale of currencies. Since a certain level of intervention is necessary for a floating rate to be considered a dirty float, it does not actually function as a true floating rate.