Why monetary board: Monetary board and endogenic price flexibility

• Main Author: Bašić Tamara
• Format: Article
• Language: English
• Published: Faculty of Economics, Belgrade 2004-01-01
• Series: Ekonomski Anali
• Online Access: http://www.doiserbia.nb.rs/img/doi/0013-3264/2004/0013-32640462175B.pdf

The paper presents a model which proves that a unilateral exchange rate fixing, i.e. monetary board, as opposed to certain opinions, is an optimal policy since it increases flexibility of nominal prices, which is the ultimate goal of a flexible exchange rate policy. A suitable calibration of the model shows that the higher the initial price flexibility, the lower the difference needed for "utility increase" in getting the producers to switch from fixed to flexible prices. The results obtained in all cases indicate that exchange rate fixing increases price flexibility, which proves that a unilateral exchange rate fixing, i.e. monetary board, could be an optimal monetary policy.