A New Approach to Exchange Rate Management in Small Open Financially Integrated Economies

Briguglio, Lino (Editor), Handbook of Small States - Economic, Social and Environmental Issues, Routledge, April 2018, Forthcoming

18 Pages Posted: 16 Jun 2017 Last revised: 4 Dec 2017

See all articles by DeLisle Worrell

DeLisle Worrell

Central Bank of Barbados; Retired

Winston Moore

University of the West Indies, Cave Hill

Jamila Beckles

Central Bank of Barbados

Date Written: December 1, 2017

Abstract

We propose an integrated fiscal and monetary approach to economic stabilisation policy in small open financially integrated economies (SOFIE’s), using fiscal policy to achieve external balance at a targeted exchange rate. This approach overcomes the conundrum of the conventional Mundell-Fleming view, in today’s world of international financial integration, where capital controls do not insulate the small domestic economy, and where local authorities cannot be indifferent to the volatility of the exchange rate of local currency, and the potential harm to savings, investment, capital flight and domestic financial stability. In today’s world, the standard prescription of flexible exchange rates and independent monetary control targeting inflation presents challenges with which SOFIE’s have struggled, with little success. We describe the framework for an alternative which suits the circumstances of SOFIE’s.

Keywords: exchange rate, open economy, international financial flows, devaluation, small economy, capital controls, Mundell-Fleming

JEL Classification: F3, G2

Suggested Citation

Worrell, DeLisle and Moore, Winston and Beckles, Jamila, A New Approach to Exchange Rate Management in Small Open Financially Integrated Economies (December 1, 2017). Briguglio, Lino (Editor), Handbook of Small States - Economic, Social and Environmental Issues, Routledge, April 2018, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2986488 or http://dx.doi.org/10.2139/ssrn.2986488

DeLisle Worrell (Contact Author)

Central Bank of Barbados ( email )

PO Box 1016
Spry Street
Bridgetown
Barbados
2462564155 (Phone)

HOME PAGE: http://www.DeLisleWorrell.com

Retired ( email )

Glenisla
Fisherpond
St. Jospeh BB21000
Barbados

Winston Moore

University of the West Indies, Cave Hill ( email )

Bridgetown
Barbados

Jamila Beckles

Central Bank of Barbados ( email )

Tom Adams Financial Centre
Bridgetown
Barbados

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