Exchange Rate Policy
Exchange rate policy involves choosing an exchange rate system and determining the particular rate at which foreign exchange transactions will take place. A country's exchange rate policy affects the overall level of domestic prices and its relative price structure in domestic currency terms between goods which are traded internationally (tradables) and goods which are produced for the domestic market (non-tradables or home goods).
A country's economic structure and its institutional characteristics are important considerations in determining exchange rate policy.
The following characteristics are usually taken into account:
• reliance on primary commodity production and exports (minerals and agricultural crops);
• dependence on essential imports (capital equipment);
• use of direct investment and official and private lending;
• development of financial markets, availability of experienced personnel, foreign exchange dealers in particular.
Countries have quite a number of options for exchange rate policy: