Bank rate or forward exchange policy

Abstract

The paper focuses on the impact of monetary policy on the forward exchange rate. While movements of long-term capital may be considered to depend mostly on development overseas, international movements of short-term funds are amenable to available means of control. Interest rate policy faces the dilemma of having to react to both the level of domestic demand or prices and international movements of mobile funds. If a pegged exchange rate must be defended without pegging the forward exchange rate, the dilemma seems to have no solution. If instead authorities are not obliged to confine their operations to the spot market, a technique to overcome to dilemma is available. JEL: E42, E43, E52, F31, G15, G21

Keywords

• Monetary policy
• forward exchange rate
• interest rate policy
• pegged exchange rate