Loss of Interest Rate Control under a Credibly Fixed Exchange Rate due to UIP
Assuming the Uncovered Interest Parity (UIP) condition holds, a country with a credibly fixed exchange rate relinquishes its ability to independently set its domestic interest rate. Because the market has full confidence in the peg, expected currency depreciation is zero, forcing the domestic interest rate to equal the foreign rate (). This effectively nullifies the central bank's de jure power over monetary policy, which is instead dictated by the need to maintain the exchange rate peg.
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Introduction to Macroeconomics Course
Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Loss of Interest Rate Control under a Credibly Fixed Exchange Rate due to UIP
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