FISCAL POLICY MEASURES are the best way for Barbados to maintain its preferred currency exchange rate vis-à-vis the United States dollar.
That’s the recommendation of a group of local economists headed by former Central Bank governor Dr DeLisle Worrell.
Worrell, of DeLisle Worrell and Associates, Inc., Professor Winston Moore, who heads the Department of Economics at the University of the West Indies Cave Hill Campus, and Central Bank of Barbados economist Jamila Beckles recently released the paper, Anchoring The Exchange Rate In The Small Open Economy: Why And How?
In the document, they proposed “an integrated fiscal and monetary approach to economic stabilisation policy in small open financially integrated economies (SOFIEs), using fiscal policy to achieve external balance at a targeted exchange rate”.
“This approach overcomes the conundrum of the conventional Mundell-Fleming view, in today’s world of international financial integration, where capital controls do not insulate the small domestic economy, and where local authorities cannot be indifferent to the volatility of the exchange rate of local currency, and the potential harm to savings, investment, capital flight and domestic financial stability,” the paper said.
“In today’s world, the standard prescription of flexible exchange rates and independent monetary control targeting inflation presents challenges with which SOFIEs have struggled, with little success. We describe the framework for an alternative which suits the circumstances of SOFIEs.”
The framework proposed by the three economists was called “a simple alternative framework for policy formulation which integrates fiscal policy tools, which are known to be the most powerful instruments available to open economies – some would argue to all economies – with monetary and exchange rate objectives.
“By calibrating the fiscal stance . . . to ensure external balance in a forward-looking policy framework, with up-to-date monitoring of targets and coordinated arrangements for policy implementation and correction, SOFIEs may attain a high degree of control over their economic fortunes, whatever the international economic circumstances they might encounter,” they added. (SC)