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Table of Contents

  • Summary

  • I. Introduction

  • II. The Evolution of Exchange Rate Arrangements and Principal Monetary Policy Instruments in Selected Asian Countries

  • III. The Choice of Monetary Policy Instruments and Exchange Rate Arrangements

    • 1. Monetary and exchange rate policies with highly integrated markets

      • a. Real and monetary shocks

      • b. Other considerations

    • 2. Monetary and exchange rate policies with imperfect but increasing market integration

      • a. The choice of money and credit instruments

        • (1) Integration of domestic and external goods markets

        • (2) Fiscal imbalances and the structure of domestic financial markets

        • (3) Integration with external financial markets

        • (4) Exchange rate policy

      • b. Monetary and exchange rate policies during periods of extensive structural change

  • IV. Conclusions

  • Appendix

  • References

  • Table 1. Exchange Rate Arrangements, Monetary Instruments, and Financial Characteristics of Selected Asian Countries

Summary

This paper examines the relationship between monetary and exchange rate policies by considering the factors that have led the authorities in developed and developing countries in Asia to alter their use of monetary policy instruments and exchange rate arrangements since the mid-1970s.

For these countries, this period has encompassed increased flexibility in exchange rate arrangements, the substitution of monetary for credit policy instruments, major reforms of domestic financial systems, and a growing integration of domestic and external financial markets.

The analysis first examines the extent to which real and monetary shocks, country size, and the degree of goods-market and capital-market integration can explain the evolution of exchange rate arrangements.

It then considers the factors influencing the choice of money and credit policy instruments in order to explain why some developing countries have continued to rely on credit instruments, while many other countries have increasingly relied on monetary instruments. Finally, there is an examination of issues involved in integrating monetary and exchange policies into programs designed to bring about extensive trade and financial market reforms.

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Exchange Rate Arrangements and Monetary Policy
Author:
International Monetary Fund