Monetary Policy Under an Exchange Rate Anchor
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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.
Series:
Working Paper No. 2020/180
Subject:
Banking Central bank policy rate Exchange rate anchor Exchange rate arrangements Exchange rate policy Exchange rates Financial services Foreign exchange Monetary policy
Frequency:
regular
English
Publication Date:
September 4, 2020
ISBN/ISSN:
9781513556383/1018-5941
Stock No:
WPIEA2020180
Pages:
47
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