Answer to Question #213640 in Macroeconomics for Keitumetse

Question

Suppose you are appointed as an economic advisor to the government of Zimbabwe. Assume the government is facing a difficult choice on the type of exchange rate policy to be adopted. Advise the government of Zimbabwe on the key considerations in choosing the exchange rate regime (whether fixed, floating etc.)

Answer 1

When deciding on the exchange rate regime, it is important for Zimbabwe to peg its currency to achieve credibility as well as control its domestic inflation. I would advise the government to be into float because of its larger real shocks incidences.

The nation needs to also consider reserves adequacy, risk exposure of exchange rate, dollarization and optimal currency field criteria, which float may be effective more.