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two types of foreign exchange rate targeting

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Briefly state the advantages and disadvantages of foreign exchange rate targeting.

Briefly state the advantages and disadvantages for each tool the Fed can use to manipulate the federal funds rate.

Briefly state the advantages and disadvantages for each target the Fed can use to anchor monetary policy, i.e. inflation target, money target, or implicit anchor.

Briefly describe the criteria for choosing a monetary policy instrument.

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Solution Preview

(1) There are in general two types of foreign exchange rate targeting:
- towards the fixed rate, and
- towards the floating one.
The advantages of fixed exchange rates are the disadvantages of floating rates: fixed rates provide greater certainty for exporters and importers and, under normal circumstances, there is less speculative activity - although this depends on whether the dealers in the foreign exchange markets regard a given fixed exchange rate as appropriate and credible.
Now, advantages of floating exchange rates - ...

Solution Summary

This post articulates the advantages and disadvantages of foreign exchange rate targeting.

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