Exchange Rate Policy and Capital Flow Management

Abstract

This chapter discusses the relationship between exchange rate and foreign capital flow management, as influenced by the increasingly integrated nature of the global economy and finance. From the central bank's perspective, a strategy mix composed of interest rate and exchange rate stabilization policy alongside capital flow management has the potential to provide better results for monetary and financial system stability. Interest rate policy still needs to be directed towards achieving price stability, while exchange rate stabilization policy and capital flow management are aimed at maintaining external and internal stability. This chapter also sheds light on the closeness of the relationship between monetary stability and financial system stability. The magnitude of changes in foreign capital flows not only threatens macroeconomic stability, but also creates pressures on financial system stability, such as liquidity and bank credit growth. In light of this, the integration of monetary policy and macroprudential policy is increasingly important.KeywordsExchange rate policyCapital flow managementMonetary policy trilemma