Exchange Rates (1 Viewer)

[Saintly Devil]

One of the supposed advantages of a fixed exchange rate is that you (a country with a fixed exchange rate) can conduct similar monetary policy to the country that you have pegged your currency to.

Can anyone explain why this is the case?

Also (this is straight out of Tim Riley's book, pg 100):

"In theory countries which are susceptible to external shocks to their nominal exchange rates are advantaged by fixing their exchange rate to a country with a low inflation rate"

Why?


Thanks in advance.

 

[bobo123]

read the bit below about the EU

they peg rates to follow the country's low inflation record and the way of reproducing the low inflation is by copying their interest rate structure in hopes that domestic market forces will respond in a similar fashion to those of the pegged nation.