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Monetary Policy Under an Exchange Rate Anchor

Author

Listed:
  • Mariam El Hamiani Khatat
  • Mark Buessings-Loercks
  • Mr. Vincent Fleuriet

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.

Suggested Citation

  • Mariam El Hamiani Khatat & Mark Buessings-Loercks & Mr. Vincent Fleuriet, 2020. "Monetary Policy Under an Exchange Rate Anchor," IMF Working Papers 2020/180, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/180
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    Cited by:

    1. Cañon, Carlos & Gerba, Eddie & Pambira, Alberto & Stoja, Evarist, 2023. "An unconventional FX tail risk story," LSE Research Online Documents on Economics 120052, London School of Economics and Political Science, LSE Library.
    2. Petrovska Magdalena & Tonovska Jasna & Nikolov Miso & Sulejmani Artan, 2022. "Evaluating Monetary Policy Effectiveness in North Macedonia: Evidence from a Bayesian Favar Framework," South East European Journal of Economics and Business, Sciendo, vol. 17(2), pages 67-82, December.

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