In recent months, several emerging markets such as India, Indonesia, Brazil and to a lesser extent Brazil have seen a sharp depreciation of their currencies against the US dollar, as well as an increase in volatility of their markets.

In recent months, several emerging markets such as India, Indonesia, Brazil and to a lesser extent Brazil have seen a sharp depreciation of their currencies against the US dollar, as well as an increase in volatility of their markets.

Question
3. In recent months, several emerging markets such as India, Indonesia, Brazil and to a lesser extent Brazil have seen a sharp depreciation of their currencies against the US dollar, as well as an increase in volatility of their markets. In order to address this issue, suppose a country like Indonesia were tomorrow to announce the following new policies by the central bank:

· Fixed exchange rate of the Indonesian rupiah against the dollar through open market operations

· Free flow of capital in and out of Indonesia

· Continuous adjustment of monetary policy by the central bank Is this a good strategy? What are the likely outcomes of such a strategy? (This is a thinking question! Hint: suppose there is a large downward pressure on the rupiah and the bank needs to conduct open market operations to keep it fixed. What will happen to the other two aspects of the bank’s strategy?)Question
3. In recent months, several emerging markets such as India, Indonesia, Brazil and to a lesser extent Brazil have seen a sharp depreciation of their currencies against the US dollar, as well as an increase in volatility of their markets. In order to address this issue, suppose a country like Indonesia were tomorrow to announce the following new policies by the central bank:

· Fixed exchange rate of the Indonesian rupiah against the dollar through open market operations

· Free flow of capital in and out of Indonesia

· Continuous adjustment of monetary policy by the central bank Is this a good strategy? What are the likely outcomes of such a strategy? (This is a thinking question! Hint: suppose there is a large downward pressure on the rupiah and the bank needs to conduct open market operations to keep it fixed. What will happen to the other two aspects of the bank’s strategy?)