Policy Options

Abstract

The strands of literature considered inherently offer different policy implications to avoid currency crises. While FGMs simply advise governments to ensure the consistency of internal and external targets to prevent speculative attacks from occurring, it is in practice harder to deal with the perceived authorities’ temptation to pursue domestic policy more expansionary than the exchange rate peg would allow. In this respect, SGMs suggest that the ability of governments to act on temptation can be effectively reduced by handing over the conduct of monetary policy to a conservative and independent central bank and by repeated affirmations of fiscal prudence and toughness in anti-inflation policy. They further recommend supply-side policies if the desired level of output is above the one associated with stable prices such as reforming the labor market, fostering investments in capital and infrastructure, and the acceptance of more realistic targets for output and employment.