Evaluating a Central Banker's Policy Statement
A newly appointed central bank governor of a small open economy makes the following public statement: 'Our nation is committed to two pillars of stability: a fixed exchange rate to anchor our currency and open capital markets to attract foreign investment. To combat the current economic slowdown, my first act will be to lower our policy interest rate significantly to encourage domestic borrowing and spending. These three policies together will usher in a new era of prosperity.' Critically evaluate the feasibility of the governor's proposed strategy. In your response, explain the fundamental economic conflict inherent in this policy combination and predict the likely consequences for the country's foreign exchange reserves.
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Evaluating a Central Banker's Policy Statement