"This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or...

Two macroeconomic constraints determine the credibility of an exchange rate system: the availability of foreign exchange and the sustainability of fiscal balance. The following paper analyses the relative importance of these constraints for fixed and flexible exchange rate systems, examines the...