Discrepancy between Exchange Rate Regime and Monetary Policy

The essence of the argument in the paper comes from a possible dichotomy between exchange rate and monetary policies. Many transition economies adopted exchange rate regimes characterised by different degrees of flexibility and management. Several countries, including the Czech Republic, adopted an exchange regime based on a currency basket peg. In the case of this fixed exchange rate regime, a country has by definition an exchange regime policy, gives up its own monetary policy, and the origin of a monetary base is purely a foreign one. The exact opposite is true for a floating exchange regime. A crucial difference arises in the case of a pegged regime whereby a country maintains both exchange rate and monetary policies. Under such an arrangement, eventual conflict between these two policies is likely to materialise. Such a conflict may eventually evolve into a balance of payments crisis.