ABSTRACT
Destabilising economic disturbances can originate in both product and money markets and may be internally or externally induced. Fixed exchange rates are intended to insulate the economy against transitory economic disturbances whose destabilising impact is absorbed by changes in official reserves. Stabilisation measures consist of monetary policy, fiscal policy and, ultimately, exchange rate policy, and may be applied in various combinations depending on the nature and severity of the economic disturbances. Stabilisation policies which operate through interest rate-induced changes in capital flows will then be unable to achieve joint equilibrium which will be restorable only with direct measures such as import or exchange controls or exchange rate realignments. Perfect international capital mobility might apply to a small country which faces a perfectly elastic supply of international capital at prevailing international interest rates. Fixed exchange rates can insulate the economy against internally or externally-induced monetary shocks.
