Chapter

Exchange Rate Arrangements and Anchors of Monetary Policy1,2

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2004
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Exchange Rate

Regime
Monetary Policy Framework
(Number of

countries)
Exchange rate anchorMonetary

aggregate

target
Inflation

targeting

framework
IMF-supported or

other monetary

program
Other
Exchange

arrangements

with no separate

legal tender (41)
Another

currency as

legal tender
Euro area4
CFA franc zoneAustria
ECCU3WAEMUCAEMCBelgium
Ecuador*Antigua andBenin*CameroonFinland
El Salvador5BarbudaBurkinaCentralFrance
KiribatiDominica*Faso*AfricanGermany
MarshallGrenadaCôteRep.Greece
IslandsSt. Kitts andd’Ivoire*Chad*Ireland
Micronesia,NevisGuinea-Congo,Italy
Fed. States ofSt. LuciaBissauRep. ofLuxembourg
PalauSt. VincentMaliEquatorialNetherlands
Panamaand theNigerGuineaPortugal
San MarinoGrenadinesSenegal*GabonSpain
Timor-Leste,Togo
Dem. Rep. of
Currency board

arrangements (7)
Bosnia and Herzegovina
Brunei Darussalam
Bulgaria*
China—Hong Kong SAR
Djibouti
Estonia
Lithuania
Other

conventional

fixed peg

arrangements (41)
Against a single currencv (32)Against a composite (9)China, P.R. of†7
ArubaBotswana6
Bahamas, The6Fiji
Bahrain, Kingdom ofLatvia
BarbadosLibyan Arab Jamahiriya
BelizeMalta
BhutanMorocco
Cape Verde*Samoa
China, P.R. of†7Seychelles
Comoros8Vanuatu
Eritrea
Guinea*7
Jordan*7
Kuwait
Lebanon7
Lesotho*
Macedonia, FYR*7
Malaysia
Maldives7
Namibia
Nepal
Netherlands Antilles
Oman
Qatar
Saudi Arabia
Suriname6,7
Swaziland
Syrian Arab Rep.6
Turkmenistan7
Ukraine7
United Arab Emirates
Venezuela, Rep. Bolivariana de
Zimbabwe7
Pegged exchange

rates within

horizontal

bands (4)9
Within a cooperative

arrangement (1)
Other band

arrangements (3)
Hungary†
Denmark10Cyprus
Hungary†
Tonga
Crawling pegs (5)Bolivia*Tunisia
Costa Rica
Nicaragua*
Solomon Islands7
Tunisia
Exchange rates

within crawling

bands (5)11
BelarusIsrael†
Honduras
Israel†
Romania7
Slovenia†7
Managed floating with no preannounced path for the exchange rate (50)Bangladesh*Czech Rep.Argentina*Afghanistan, I.S. of
Cambodia6Peru*7Azerbaijan*Algeria4
Egypt6ThailandCroatia*Angola4
Ghana*7Ethiopia*Burundi4
Guyana*Georgia*Dominican Rep.*4
IndonesiaHaiti4,7Gambia, The*4
Iran, I.R. ofKenyaIndia4
Jamaica7Kyrgyz Rep.*Iraq
MauritiusLao PDR*6Kazakhstan4
SudanMoldova7Mauritania*
ZambiaMongolia*Myanmar4,6,7
Mozambique7Nigeria
Pakistan*Paraguay4
Rwanda*Russian Federation4
Serbia and Montenegro*12São Tomé and Príncipe
Tajikistan*Singapore4
Vietnam*Slovak Rep.4
Trinidad and Tobago
Uzbekistan4,6
Independently floating (34)MalawiAustraliaAlbania*Japan4
Sierra Leone*BrazilArmenia*Liberia4
CanadaCongo, Dem. Rep. ofPapua New Guinea4
Sri Lanka*Chile6Somalia6,13
Uruguay*Colombia*Madagascar*Switzerland4
Yemen, Rep. ofGuatemala*Tanzania*United States4
IcelandUganda*
Korea
Mexico
New Zealand
Norway
Philippines
Poland
South Africa
Sweden
Turkey*
United Kingdom
Source: IMF staff reports.

Classification of Exchange Rate Arrangements and Monetary Policy Frameworks

The classification system is based on the members’ actual, de facto, regimes, which may differ from their officially announced arrangements. The scheme ranks exchange rate regimes on the basis of the degree of flexibility of the arrangement. It distinguishes among the more rigid forms of pegged regimes (such as currency board arrangements); other conventional fixed peg regimes against a single currency or a basket of currencies; exchange rate bands around a fixed peg; crawling peg arrangements; and exchange rate bands around crawling pegs, in order to help assess the implications of the choice of exchange rate regime for the degree of independence of monetary policy. This includes a category to distinguish the exchange arrangements of those countries that have no separate legal tender. The system presents members’ exchange rate regimes against alternative monetary policy frameworks with the intention of using both criteria as a way of providing greater transparency in the classification scheme and to illustrate that different forms of exchange rate regimes could be consistent with similar monetary frameworks. The categories are explained in the compilation guide.

Members’ exchange rate regimes are presented against alternative monetary policy frameworks in order to present the role of the exchange rate in broad economic policy and help identify potential sources of inconsistency in the monetary-exchange rate policy mix. The monetary policy frameworks listed are as follows:

Exchange rate anchor

The monetary authority stands ready to buy or sell foreign exchange at given quoted rates to maintain the exchange rate at its preannounced level or range (the exchange rate serves as the nominal anchor or intermediate target of monetary policy). These regimes cover exchange rate regimes with no separate legal tender, currency board arrangements, fixed pegs with or without bands, and crawling pegs with or without bands, where the rate of crawl is set in a forward-looking manner.

Monetary aggregate target

The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate (reserve money, Ml, M2, etc.), and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.

Inflation targeting framework

This involves the public announcement of medium-term numerical targets for inflation, with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for obtaining its inflation objectives. Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

IMF-supported or other monetary program

This involves implementation of monetary and exchange rate policy within the confines of a framework that establishes floors for international reserves and ceilings for net domestic assets of the central bank. As the ceiling on net domestic assets limits increases in reserve money through central bank operations, indicative targets for reserve money may be appended to this system.

Other

The country has no explicitly stated nominal anchor, but rather monitors various indicators in conducting monetary policy. This is also used when no relevant information on the country is available.

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