Monetary Regime Choices for a Semi-Open Country

This paper considers regime choices facing relatively small, trade-oriented, financially liberalizing, rapidly growing countries such as the East Asian NICs. The classic question of fixed versus flexible exchange rates is considered first. Of the many factors that determine whether the advantages of fixed rates justify the loss of monetary independence, all depend on the openness of the country. One example is the advantage that stable exchange rates promote trade; the magnitude of this effect is estimated in this paper. Another example is the advantage that a fixed exchange rate can serve as a nominal anchor to monetary policy. The second half of the paper reviews the recent literature on monetary rules versus discretion, and then considers four alternative candidates for the nominal anchor for monetary policy: the money supply, nominal GNP, price level, and exchange rate. It is argued that nominal GNP dominates the money supply in general, and dominates the other two candidates under certain conditions.


Issue Date:
1994-04
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/233378
Total Pages:
67
JEL Codes:
F41
Series Statement:
Working Paper
C94-036




 Record created 2017-04-01, last modified 2017-08-29

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