Monetary Policy Under an Exchange Rate Anchor

By Mariam El Hamiani Khatat, Mark Buessings-Loercks, Vincent Fleuriet

September 4, 2020

Preview Citation

Format: Chicago

Mariam El Hamiani Khatat, Mark Buessings-Loercks, and Vincent Fleuriet. Monetary Policy Under an Exchange Rate Anchor, (USA: International Monetary Fund, 2020) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper argues that there is scope for monetary policy under an exchange rate anchor, and discusses the related monetary policy design and implementation. It shows that the exchange rate can be used as the main monetary policy instrument while the policy rate can target the exchange rate. An exchange rate anchor is compatible with an inflation objective, provided fiscal dominance is not an issue, monetary conditions are supportive of the peg, and the level of international reserves is adequate. The paper argues that, while an exchange rate anchor is more prone to policy inconsistencies, there is ample scope for strengthening monetary policy design and implementation under soft pegs. In that context, the principles of dichotomy and interest rate parity are critical.

Subject: Banking, Central bank policy rate, Exchange rate anchor, Exchange rate arrangements, Exchange rate policy, Exchange rates, Financial services, Foreign exchange, Monetary policy

Keywords: Banking system, C. central bank monetary policy, Central bank policy rate, Current account, Exchange rate, Exchange rate anchor, Exchange rate appreciation, Exchange rate arrangements, Exchange rate band, Exchange rate policy, Exchange rate policy stance, Exchange rate regime, Exchange rate volatility, Exchange rates, Foreign exchange interventions, Global, Interest rate, Interest rate parity, Monetary operations, Monetary policy, Monetary policy credibility, Monetary policy framework, Monetary policy implementation, Monetary policy rule, Monetary policy rules, Nominal exchange rate, Policy stance, Singapore dollar, WP

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/180
Stock No:

WPIEA2020180
ISBN:

9781513556383
ISSN:

1018-5941

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