After the collapse of the Bretton Woods system one of the key economic decisions facing any government is its choice of exchange rate regime. Whether to x the exchange rate or let it oat and be determined by the market – is a very important question for many countries because the exchange rate regime can have signi cant impacts on a variety of aspects of the economy. The article analyzes the macroeconomic implications of di erent exchange rate regimes.
The modern era includes a wide variety of exchange rate regime experiences across countries – from hard peg to free oating. But regimes declared by the government (de jure regimes) often di er from those used in practice (de facto regimes). Free oating regime is used mostly be advanced economies (including euro area). The traditional choice of emerging and developing economies – xed exchange rate and intermediate regimes, when exchange rate can be managed by central bank.
Fixing the exchange rate may provide a "nominal anchor" for the economy to help discipline the central bank from printing too much money. This leads to signi cantly lower in ation rate in pegged countries. In addition pegging promotes an expansion of bilateral trade with the base country. But at the same time xed exchange rate limits monetary policy independence. The policy trilemma states that the government of a country can choose no more than two of three policy options: free capital mobility, xed exchange rates, and domestic monetary autonomy. Using oating exchange rate allows a country to pursue independent monetary policy, but scal policy can results in an undesirable change of the real exchange rate, especially when international capital mobility is high.
Key words: exchange rate regime, xed exchange rate, oating exchange rate, currency board, “nominal anchor”, monetary police, trilemma, macroeconomic policy in an open economy.
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