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Vesna Martin

Ekonomske ideje i praksa, 2018, issue 31, 41-57

Abstract: Main goals of monetary policy of almost all central banks are to provide monetary and financial stability. As a way to achieve these goals central banks manages money and interest rates so as to accomplish a low, stable and predictable inflation rate, which creates an environment conducive to sustainable economic development and employment growth. In conducting monetary policy central bank can use different instrument, such as reference rate, standing facility, required reserves and interventions in the foreign exchange market. This paper analyzes three cases of central bank which were using exchange rate as additional instrument of monetary policy. In case of Central bank of the Czech Republic exchange rate was used to prevent deflation, in case of the Swiss Central Bank as a way to deal with massive overvaluation of the Swiss franc which was posing an acute threat to the Swiss economy and carries the risk of a deflationary development and in case of Bank of Israel as a way to increase its foreign exchange reserves by purchasing foreign currency in the open market. Main finding of the paper is that all analyzed central banks, which were using exchange rate as additional instrument, did not jeopardize price and financial stability as their main monetary policy objective.

Keywords: exchage rate; interventions; monetary policy and its instruments; foreign exchange reserves (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:beo:ekidpr:y:2018:i:31:p:41-57