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Worrell: Fixed rate works for Barbados

marciadottin, [email protected]

Worrell: Fixed rate works for Barbados

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Central Bank Governor Dr DeLisle Worrell yesterday mounted a strong defence of the island’s fixed exchange rate, a staple of the Barbados economy, before a field of international economic experts.
He was addressing the Peterson Institute for International Economics in Washington, DC, and was hailed by the host as a distinguished scholar in his field, while Barbados was regarded as a “uniquely interesting” example for monetary and fiscal policy in a small open economy.
The governor spoke on the topic: Macroeconomic Options For Very Small Open Economies. The invited guests were among the world’s recognised experts in the area of economics and international finance, and Worrell later responded to questions from them.
He said that international financial institutions, rating agencies and the international financial community expected small economies like Barbados to adopt the same combination of flexible exchange rate and adaptive monetary policy recommended for large economies.
“When we choose instead to anchor the exchange rate and to manage aggregate demand through fiscal policy, we are accused of being masochistic . . . . The reality is that we have no other choice,” he stated.
Expansion, the economist added, was sustainable for small economies only if led by the sectors that earned and saved foreign exchange.
The range of exports in small economies were narrow but the range of imports wide, so there was very little scope for import substitution and exchange rate depreciation did not necessary provide an incentive for higher exports, he said.
“The depreciation leaves export prices unchanged, in foreign currency terms, and therefore has no immediate effect on market prospects . . . . Whether there is a later effect depends on the extent to which domestic producers of export are able to reduce cost measured in foreign currency,” he said.
The advantage of the framework as employed by Barbados was that the predictability of the exchange rate was highly valued by economic agents, and the ability to keep the rate unchanged over the long term lent credibility to economic policy, Worrell explained.
The exchange rate anchor was an effective anti-inflationary policy because it did not aggravate the effects of imported inflation, the governor concluded. (AC)

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