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1. Monetary Policy under Fixed
Exchange Rate
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2. Introduction
 Many economists and business analysts have
questioned the formation of monetary policy
 This is how effective it can be under a fixed
exchange rate.
 There have been varied opinions .
 Some point out that it is ineffective and
others the opposite.
 Let us consider the behavior of monetary
policy under fixed exchange rate.
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3. Fixed Exchange Rate
 When the exchange rate is fixed, there is no need
for an independent monetary policy.
 The idea of using monetary policy to target
inflation in domestic circles is null.
 Monetary policy cannot be used to tone down the
business cycle of a government.
 This is if it has implemented the pegged
exchange rate.
 It would only be wise for the country to exercise
capital controls.
 This will hinder trades from participating in the
sale and buying of domestic currency.
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4. Capital Controls
 Exercising capital controls can significantly
curtail foreign direct investments and trade
 It can also create loopholes in the system.
 This can result into corruption and other
malpractices.
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5.  Fixed rate makes the central bank easier.
 It does not have the ability to raise money
supply .
 This is in order to enhance the expansion of
Gross National Product.
 This is why many countries find it hard to
maintain the autonomy of their currencies .
 This is in relation to whenever they implement
the policy of a fixed exchange rate.
 The central bank is ripped off the power of
influencing the interest rates, levels of Gross
National Product and exchange rates.
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6. Sample Case
 If there is a monetary policy that increases the
supply of money, an upward pressure will be exerted
on the exchange rate.
 In the case of the US fixing its exchange rate to that
of Britain.
 United States’ rate of return on assets will be
reduced below that of Britain.
 The prices of US assets will be significantly lowered.
 Traders will be demanding more pounds in exchange
for dollars.
 The end result is that the dollar will depreciate while
the pound appreciates.
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7.  Since US maintains a pegged exchange rate,
the government will be pushed to intervene.
 This will be in order to avoid the demand for
more pounds in exchange for the dollar.
 It will act by bridging in the gap through the
supply of the excess pounds that are required
by traders.
 The best way that it will do this is by selling its
reserves of pounds.
 This will be at the pegged exchange rate in
exchange for US dollars.
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8. For More About Monetary
Policy under Fixed Exchange
Rate
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