Using Fiscal Policy to Target the Exchange Rate
This paper proposes an approach to macroeconomic policy which equips the authorities in small, open, financially-integrated economies (SOFIEs)2 to target the exchange rate by influencing the volumes of trade in goods and services to achieve equilibrium at the target rate. This is achieved by the use of fiscal policy: the authorities may adjust the size of the fiscal deficit and how it is financed to contain the level of aggregate expenditure in the economy, and the demand for imports that flows from that expenditure.