IGNOU MEC 2 2014 2015 - An economy with fixed exchange rate cannot maintain an independent mon

Question

An economy with fixed exchange rate cannot maintain an independent monetary policy. Do

you agree with the above statement? Substantiate your answer with appropriate diagrams.

23 Jan 2017

Answer :

Word Count : 309

The debate of making a choice between fixed and floating exchange rate regimes is set forth by the Mundell–Fleming model, which argues that an economy (or the government) cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It must choose any two for control and leave the other to market forces.

The primary argument for a floating exchange rate is that it allows monetary policies

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