Monetary Policy Under an Exchange Rate Anchor

Author/Editor:

Mariam El Hamiani Khatat ; Mark Buessings-Loercks ; Vincent Fleuriet

Publication Date:

September 4, 2020

Electronic Access:

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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.

Series:

Working Paper No. 20/180

Frequency:

regular

English

Publication Date:

September 4, 2020

ISBN/ISSN:

9781513556383/1018-5941

Stock No:

WPIEA2020180

Format:

Paper

Pages:

47

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