Issues in exchange rate policy design and management

Abstract

This paper focused on the major issues and highlighted the factors which are crucial in the design of exchange rate policy. It also reviewed exchange rate policy in Nigeria since independence. After a brief review of models of exchange rate determination and exchange rate mechanisms, it concluded that exchange rate adjustment is required to correct flow balance of payments deficit, while reserves draw down, in addition to demand management, could prove efficacious in reversing a temporary or stock balance of payments deficit. The links between the monetary, fiscal and external accounts were provided in order to properly guide policy makers on the options to settle for in designing exchange rate policy. This is because the exchange rate affects all sectors of the economy, since it influences resource allocation, through its ability to stimulate movements in other prices. The paper was concluded on the note that the current exchange rate policy should be sustained and complemented with the application of accommodating fiscal and monetary policy measures.