Monetary Policy Under an Exchange Rate Anchor

48 Pages Posted: 30 Oct 2020

See all articles by Mariam El Hamiani Khatat

Mariam El Hamiani Khatat

International Monetary Fund (IMF)

Mark Buessings-Loercks

affiliation not provided to SSRN

Vincent Fleuriet

affiliation not provided to SSRN

Date Written: September 2020

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: Exchange rates, Exchange rate arrangements, Exchange rate anchor, Central bank policy rate, Banking, WP, tag0, exchange rate, interest rate, monetary policy, graphic tag0

JEL Classification: E61, F31, F32, E52, E43, G21

Suggested Citation

El Hamiani Khatat, Mariam and Buessings-Loercks, Mark and Fleuriet, Vincent, Monetary Policy Under an Exchange Rate Anchor (September 2020). IMF Working Paper No. 20/180, Available at SSRN: https://ssrn.com/abstract=3721205

Mariam El Hamiani Khatat (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Mark Buessings-Loercks

affiliation not provided to SSRN

No Address Available

Vincent Fleuriet

affiliation not provided to SSRN

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