Exchange Rate Management and Macroeconomic Policy: A National Perspective

Abstract

This paper reviews the literature on alternative exchange-rate arrangements for a small economy. It discusses exchange-rate management for short-run stabilization purposes and the choice of exchange rate regimes to foster policy discipline. Recent research has emphasized that the appropriate degree of exchange-rate flexibility depends on the nature of disturbances. Exchange-rate movements provide information about shocks and can serve as a basis for intervention rules. Empirically operational guidelines have not yet been provided. Floating rates are said to be desirable because they allow policy makers greater autonomy. Recent research has questioned the implicit assumption that autonomy is always useful. Rules that prevent discretionary policy may be preferable. What role, if any, the exchange rate should play in such rules has not yet been resolved.