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Title: Exchange Rates as a ‘Veil’
Author: Biagio Bossone
Published: June 2018
Pages: 105-120
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The effectiveness of exchange rates as an adjustment mechanism in a given country depends on the role played by domestic financial markets. With floating exchange rates and full integration into global financial markets, policy-making space is determined by the size of public debt and the degree of policy credibility. A large debt and weak policy credibility inhibit the power of floating rates to insulate the economy from shocks and to grant independence to its policymakers. When a country’s financial stocks are of significant size, market expectations are the fundamental determinant of equilibrium exchange rates and purchasing power.


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