Analyze the impact of the fixed exchange rate regime on the Barbados economy in the following context: •
Foreign/ External Debt Management
Domestic Interest Rates
The Barbadian Central Bank has maintained a fixed exchange rate regime since the 1970’s as a core foundation of its macroeconomic policy. A fixed exchange rate provides stability in international prices but restricts a country from pursuing policies to guide the economy to full employment or stimulate growth. Another key characteristic of Barbados’ policy is that it maintains strict capital controls. US Funds must be registered and there are strict guidelines in place for foreign exchange movement. However, fixed exchange rates once in place may become unsustainable because they are at odds with the economic fundamentals within a country. In trying to maintain a fixed exchange rate, Barbados has put itself at risk for painful macroeconomic adjustment, which is often heightened by speculative attacks on the economy. The recent global financial crisis has increased the pressure on the Barbadian economy. While the financial sector has remained stable with no bank failures to date, the trickle down effects from the developed economies has heavily impacted the country. Tourism receipts have declined sharply, the manufacturing sector has slowed and the offshore banking sector has taken a beating as demand from developed economies has evaporated. Barbados’s GDP has contracted by an estimated 1% in 2010 according to the Economic Commission for the Latin America and the Caribbean. In a February 2010 statement (Press Release No. 10/66), the IMF highlighted that measures to alleviate these economic slowdowns and consistent fiscal deficit pushed external debt-to-GDP beyond the 100%. As, a result government must now pursue a strategy of fiscal consolidation to contain debt levels. This means that debt will be the primary concern for policy makers and that growth and employment will be...
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