Intersections between Exchange Rate and Inflation Policies in IMF Recommendations

Abstract

Several developing countries have adopted a free floating exchange rate regime in recent years, especially after the late-1990s currency crisis. This regime is being advocated based on the argument that it would smooth domestic and international shocks and allow monetary policy independence. Within this framework, central banks would be able to make use of monetary policy with the sole goal of fighting inflation, which, in turn, would be enough to stabilise output. Regardless of the simplicity of this policy combination, it might not be effective in every country. Some important country-specific circumstances must be considered when analysing the possible implications and potential complications of such a policy framework. (…)