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Exchange Rate Regime and Monetary policy

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Explain how does the choice of an exchange rate regime alter the conduct of monetary policy. In addition, please also explain when it tend to increase the power of the monetary authorities and when to decrease their power.

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The solution evaluates how the choice of an exchange rate regime alter the conduct of monetary policy.

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A fixed exchange rate is a type of exchange rate regime wherein a currency's value is attached to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. As the reference value rises and falls, so does the currency pegged to it. A currency that uses a fixed exchange rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange rate. US does not have a fixed exchange rate system and rarely intervenes in this matter.

Many economists think that in most circumstances, floating exchange rates are preferable to ...

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