A small, open economy with a flexible exchange rate faces a severe negative shock to global demand for its primary export. How does the role of the exchange rate in adjusting to this shock differ if the central bank has a credible inflation target versus if it has no explicit policy anchor?

Capital Inflows and Monetary Policy Regimes

In any small open economy with a flexible exchange rate, a significant currency depreciation will invariably function as an automatic stabilizer by stimulating net exports and supporting aggregate demand.

The Stabilizing vs. Destabilizing Role of the Exchange Rate