Stabilization policies and exchange rate systems

ABSTRACT This paper takes a brief look at the relationship between stabilization policies and the exchange rate systems. First of all basic concepts about the subject was mentioned. Then effects of fixed and flexible exchange rates were taken into account. In the theoretical research phase monetary policy, fiscal policy and main economic indicators were studied respectively. At the last part of the paper, country experiences were investigated. Currency boards of Argentina and Bulgaria, inflation targets of Mexico and Israel and Turkey's performance in the last five years were examined. Because of decreasing importance of the exchange rate bands, this kind of regimes were not searched theoretically. But some examples of the exchange rate bands can be seen in country experiences briefly. There is a dual seperation in the area of exchange rate regimes. One of them is the fixed rates and the other is flexible. In this study currency boards on the fixed side and the inflation targeting on the flexible side were preceded. In developed and developing countries, currency board type monetary policies are out of fashion. Rule-based exchange rate systems are mostly applied in the small open economies who trades with one dominant trade partner. Big economies are prefering inflation targets. In most of the developed countries inflation problem was solved. But new problems are about to come. This paper draws a conclusion that main problems will be unemployment and income distribution in the near future. Keywords: Exchange rate, stabilizaiton policy, inflation targeting, currency board, optimum currency areas