Bank of Israel governor and a former official of International Monetary Fund (IMF) Stanley Fischer has argued that ?flexible inflation targeting is the best way of conducting money policy?.
“The tripartite set of goals of money policy set out in modern central bank laws provide the best understanding of what a central bank should try to achieve. Among other issues a central bank should aim to maintain price stability, to support the other goals of economic policy, particularly growth and employment, so long as medium term price stability ? over the course of a year or two or even three ? is preserved, and to support and promote the stability and efficiency of the financial system,” Fischer said while delivering the third PR Brahmananda Memorial Lecture on ?Central Bank Lessons from the Global Crisis?.
According to Fischer the (real) exchange rate is one of the two most important macroeconomic variables in a small open economy, the (real) interest rate being the other. According to Fischer, no central banker in such an economy can be indifferent to the level of the exchange rate.
He, however, also acknowledged that there are no easy choices in exchange rate management. It is better to operate with a flexible exchange rate system and with a more open capital account.
“But ‘flexible’ does not mean that a country should not intervene in the foreign exchange market, or that the capital account should be completely open. Rather, it means that the country should not draw an exchange rate line in the sand and declare ‘thus far, and no further’. Countries should not commit themselves to defending a particular exchange rate,” he said.