Target and Instruments for the External Sector with an Open Capital Account

with an Open Capital Account Sitikantha Pattanaik The move to a market-determined exchange rate system alongside surges in private capital flows has constrained the authorities from using the exchange rate essentially as an instrument since ensuring a stable/non-appreciating exchange rate has become an objective in itself The sacrifice of monetary independence resulting from large intervention pursued with a view to preventing significant real appreciation has brought to the fore the government's commitment to a sustainable level of current account deficit. But the conduct of exchange rate policy whether to use the exchange rate as an instrument or a target -has turned increasingly complex. Consistently preventing the exchange rate from settling at levels justified by market forces may emerge as a major stumbling block in furthering the process of liberalisation of capital account transactions.