Fixed Exchange Rates In a regime of fixed exchange rates, how might a Central Bank operate its monetary policy and its policy for intervention in foreign exchange markets? Why does it need foreign exchange reserves? The last 20 years have seen an increased international interdependence due to the reduction in the controls on capital flows between countries have been much reduced. Also, since the early 1970's, many countries have permitted much more flexibility in their exchange rates. These developments have raised several issues: how does the exchange rate regime affect the efficacy of domestic monetary and f....

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