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Fixed Exchange Rates and the Autonomy of Monetary Policy

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  • Romain Veyrune
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    Abstract

    This paper compares monetary policy of currency boards with that of the franc zone during the period 1956-2005. It concludes that monetary policy in the zone was more autonomous than under a currency board, even though both systems faced the same exchange rate constraint. So far, the contingency line provided by the French treasury and capital controls have allowed the zone to combine a fixed exchange rate and a relatively autonomous monetary policy. Financial development and zone enlargement would challenge this relative autonomy for two reasons: (1) the potential cost to the French treasury would increase; and (2) residents would potentially be able to avoid capital controls. For the zone to maintain its fixed exchange rate, close targeting of foreign reserves would become important.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/34.

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    Length: 23
    Date of creation: 01 Feb 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/34

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    Related research

    Keywords: Currency boards; monetary policy; exchange rate; fixed exchange rate; money supply; central bank; monetary authorities; monetary policy autonomy; monetary unions; monetary union; monetary cooperation; exchange rates; autonomous monetary policy; fixed exchange rates; monetary independence; monetary fund; exchange rate regime; exchange rate arrangement; money stock; exchange restrictions; flexible exchange rate; exchange rate arrangements; currency exchange; nominal exchange rate; money transfer; exchange controls; exchange rate volatility; inflation; monetary area; exchange rate misalignment; exchange rate policy; exchange rate commitment; exchange rate regimes; exchange arrangements; money demand; exchange rate adjustment; monetary theory; currency exchange rate; real exchange rate; monetary institutions; monetary autonomy; monetary community; monetary policies;

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
    2. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers 5874, National Bureau of Economic Research, Inc.
    3. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," NBER Working Papers 10396, National Bureau of Economic Research, Inc.
    4. Anja Shortland & David Stasavage, 2004. "What determines monetary policy in the Franc zone? : estimating a reaction function for the BCEAO," LSE Research Online Documents on Economics 229, London School of Economics and Political Science, LSE Library.
    5. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    6. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR & CES & MSH, vol. 15(31), pages 269-335, October.
    7. Hazel Selvon & Tracy Polius & Oral Williams, 2001. "Reserve Pooling in the Eastern Caribbean Currency Union and the CFA Franc Zone," IMF Working Papers 01/104, International Monetary Fund.
    8. Cesarano, Filippo, 1998. "Hume's specie-flow mechanism and classical monetary theory: An alternative interpretation," Journal of International Economics, Elsevier, vol. 45(1), pages 173-186, June.
    9. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
    10. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
    11. Rose, Andrew K., 1996. "Explaining exchange rate volatility: an empirical analysis of 'the holy trinity' of monetary independence, fixed exchange rates, and capital mobility," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 925-945, December.
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    Cited by:
    1. Carsten Hefeker, 2010. "Fiscal reform and monetary union in West Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 86-102.
    2. Meissner, C.M. & Oomes, N., 2006. "Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice," Cambridge Working Papers in Economics 0643, Faculty of Economics, University of Cambridge.
    3. Jorge Braga de Macedo & Luis Pereira & Afonso Reis, 2009. "Comparing Exchange Market Pressure across Five African Countries," Open Economies Review, Springer, vol. 20(5), pages 645-682, November.

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