The Role of the Exchange Rate in Monetary-Policy Rules

Abstract

a country that chooses not to "perma-nently " fix its exchange rate through a currency board, or a common currency, or some kind of dollarization, the only alternative monetary pol-icy that can work well in the long run is one based on the trinity of (i) a flexible exchange rate, (ii) an inflation target, and (iii) a monetary policy rule. ' While not often put into this three-part format, the desirability of such a monetary policy in an open economy is, in my view, the clear implication of three corresponding strands of recent monetary research: (i) research on fixed-exchange-rates regimes, including the in-

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