Exchange rate regimes
Tomáš Motl
A bit of theory...
• Role of MP: provide a “nominal anchor”:
– Some sort of price level / growth targeting:
• Inflation targeting
• Monetary aggregates targeting (P*T = M*V)
• Different tools: exchange rate, reserve requirements, …
– Nominal exchange rate targeting:
• Fixed exchange rate
• Crawling peg
• Weird rules (Laos, Angola, …)
– Commodity (gold) standard
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Monetary policy can only influence
nominal variables in the long run
• Z_t = S_t + P*_t – P_t
• Central bank cannot influence P*
• Central bank cannot influence Z in the long run
• Therefore, central bank only chooses a trade-off
between S and P
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Floating exchange rate comes with
great responsibility
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What do you need for successful
fixed exchange rate regime?
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Fixed exchange rate requires:
– Money (foreign reserves)
– Will to tighten macroeconomic policies if needed
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What it doesn’t require:
– Capable central bank and policymakers
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That’s why resource-rich countries like
fixed exchange rate
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Where is the problem?
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Fixed exchange rate often comes
with restrictions
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Why doesn’t everyone float?
• Many countries have lately moved to floating
• New responsibilities:
– How do you set interest rates?
– How do you set money growth targets?
– How do you communicate your decisions?
• The transition is not easy nor fast process, there
are many risks
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