The Optimal Monetary And Exchange Rate Policy By An Optimizing Model Under A Small Stochastic Open Economy

2) Interest rate parity (how exchange rate is determined by the flows of capital) and

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

The internet has allowed the money market to operate 24 hours a day. It has been noted however that exchange rate volatility has increased,[v] which makes it more difficult for the government to set monetary policy.

In an open and deregulated economic environment, exchange rates can play an important role in macroeconomic management for stability and growth. The increasing role of exchange rates since the early 1970s has indeed been a break from the Bretton Woods tradition of the 1950s and 1960s that assigned a limited role for exchange rates in economic affairs. However, the banking and currency crises of the 1990s that afflicted many developing countries in different regions have provided a somber lesson that in a global economic setting, exchange rate policy, and monetary and financial policy more broadly, cannot be

From the perspective of monetary mechanism, this paper explains that the essence of petrodollar system is struggling over the gains to be had from producing the world 's leading currency. Furthermore, taking Euro as an example, this paper pointed out that the potential inflationary pressure to strike the United States financial environment after the collapse of petrodollar system. By maintaining current monetary system and getting rid of tremendous budgetary deficit, this paper also gives several useful solutions that should be used to against economic rift between the U.S. and other countries and protect national economic security.

Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

If a country has a fixed exchange rate, the country’s central bank must maintain the given price of the currency with that of the foreign currencies participating. If the central bank is unable to defend the currency during a speculative attack, they may be able to sell the currency in exchange for foreign currencies anticipating that when the bank runs out of reserves it will be forced to stop defending the currency at this price. If a speculator were to calculate correctly, the

Three historical examples of the Bretton Woods system in the 1970s, the successful attacks under the European Monetary System in 1992 and 1993 and the emerging market crises of 1994-2000 prove that the fragility of a peg exchange rate is more severe under an open capital market (Obstfeld and Rogoff, 1995).

Countries with high openness level can fix their exchange rates and establish OCA to balance external payments. McKinnon believes that openness influences the choice of exchange rate regime. Real depreciation in a high economic open country will lead to inflation, the

The real exchange rate, which is a measure of the price of foreign goods, relative to domestic goods across different countries, is a critical factor in determining the capital account, along with the interest rate. It is

In monetary policy, exchange rates serve either as a target, an instrument or an indicator depending whether it is fixed or floating. Conversely, the focus of this essay is on floating exchange rates, the countries that applied it in the 1970s and its chief advantages. The paper argues that the chief advantages to letting a country’s currency float on the exchange rates are threefold. First, it is principally determined by market forces thus underlying this fact is the efficient allocation of resources. Secondly, countries with floating exchange rates have independent and autonomous monetary policy. Lastly, the central bank has no need to intervene; capital mobility is possible. These advantages will be analysed using the realism and the analytical liberalism approaches. Specifically, the paper examines countries from the 1970s that followed floating exchange rates. To do so, the assumptions of the two approaches will be surveyed. A historical account of G-10 countries that moved to floating exchange rates later in the 1970s will be examined.

The wide spread of the swap lines and the increase of their scope represents a new trend in the practice of the central banks and is worth a thorough research. Certain authors, for instance Moreno (2010), Destais (2013), Aizenman, Jinjarak and Park (2011) claim that such currency agreements may decrease the necessity of the foreign-exchange reserves allocation and become an alternative to such credit instruments of the international market as the IMF credit lines.

Many researches have been conducted on the influence that the increasing exchange rate has on the trade balance deficit in developing countries. This paper contributes to the literature by investigating and testing whether the J-curve phenomenon exists in Jamaica.

EP and Inflation Targeting to terms of trade shocks could be a way of assessment of these regimes. Frankel (2005) compares the response of PEPI or PEP with Inflation Targeting. Under PEP or PEPI, when the price of exports rises in international market, the currency appreciates. When the export price falls, PEP or PEPI automatically causes depreciation in the currency. This result is desirable and is confirmed by textbook theory.

Keywords: Small Open Economy; Dynamic Stochastic General Equilibrium Modeling; Bayesian Techniques; New Keynesian Macroeconomics; Central Bank Independence; Sri Lanka.