Central Bank Exchange Rate Policy

Abstract

Interest in central bank exchange rate policy has been stimulated by two questions which have arisen in the context of experience with managed or floating exchange rates since the end of the international fixed parity system in the spring of 1973. The first and broader question is what determines exchange rates when they are managed or floating, including the role of central banks and monetary policy in such determination. The second, narrower, question is: To what extent discretionary exchange rate policy gives national monetary authorities a policy instrument additional to the instruments employed in implementing control over domestic interest rates or money stocks. This second issue involves the distinction between sterilised and non-sterilised exchange market intervention and the effectiveness of each in influencing exchange rates. Central banks and finance ministries have recently completed a co-operative investigation of this second issue and have published their findings in a ‘Report of the Working Group on Exchange Market Intervention’ (March 1983).¹