Document Type

Report

Publication Date

3-1977

Number

54

Abstract

Proponents of flexible exchange rates have long claimed that one of the main advantages of a flexible exchange rate regime is that It allows a nation to pursue an Independent monetary policy. Under a system of fixed exchange rates, the actions of the domestic monetary authorities are limited by their ability to finance a balance of payments deficit. Whether a nation is small (in the sense that its monetary authorities cannot control the nominal money supply) or large (in the sense that its actions can affect the world money supply) fixed exchange rates prevent the domestic monetary authorities from continually expanding the domestic component of the money supply at a rate greater than the rate of growth of the demand for domestic money.