Exchange rate regimes guide monetary policy decisions from "summary" of International Money and Finance by Michael Melvin
Exchange rate regimes play a crucial role in influencing monetary policy decisions in a country. The choice of exchange rate regime, whether fixed or flexible, affects how monetary authorities conduct policy to achieve macroeconomic objectives. Under a fixed exchange rate regime, the central bank is committed to maintaining a specific exchange rate against a major currency or a basket of currencies. This commitment limits the central bank's ability to independently pursue domestic monetary policy objectives. In such a regime, the central bank may need to intervene in the foreign exchange market to maintain the fixed exchange rate, which can lead to a loss of monetary policy independence. On the other hand, in a flexible exchange rate regime, the exchange rate is determined by market forces and can fluctuate freely. In this case, the central bank has more freedom to adjust mone...
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