Monetary Policy Under an Exchange Rate Anchor

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

No 2020/180, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: 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 (search for similar items in EconPapers)
Pages: 47
Date: 2020-09-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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