Monetary Policy Under an Exchange Rate Anchor

Author: Mariam El Hamiani Khatat, Mark Buessings-Loercks, and Mr. Vincent Fleuriet

Volume/Issue: Volume 2020 Issue 180

Publication date: September 2020

ISBN: 9781513556383

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Banks and Banking , Money and Monetary Policy , WP , exchange rate , interest rate , monetary policy , monetary policy framework , exchange rate regime , interest rate parity , monetary policy rules , monetary operations , foreign exchange interventions , policy stance , Singapore dollar , monetary policy rule , banking system , current account , exchange rate volatility , exchange rate band , monetary policy credibility , exchange rate policy stance , exchange rate appreciation , nominal exchange rate , Exchange rates , Exchange rate arrangements , Exchange rate anchor , Central bank policy rate , Exchange rate policy , Global , C , central bank monetary policy , monetary policy implementation

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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.