The Exchange Rate: To Fix or not to Fix

The Jamaican Economy in a dollarised situation, using the US Dollar as the anchor currency, would adopt conditions conducive to economic stability and growth. However, fundamental change in the current arrangement may be premature at this stage.

The Bank of Jamaica (BOJ) grew out of the need for a dominant financial institution to be established at the time of independence.  The institution would oversee the expected new thrust in the financial system to match the increased political authority which Independence would bring.

Prior to the advent of the BOJ, the monetary authority was a currency board which had a very limited role.  It was the mechanism used to exchange Jamaican currency for hard currency, such as sterling and the dollar, and vice versa.  It had no power of decision in monetary or foreign exchange policy.

The Jamaica Currency Board was part of a general system of currency management called the Colonial Exchange Standard. The system operated out of London and was available to all colonial countries. The currency board system provided automatic cover for exchange risks which, it was argued, contributed to monetary stability and development of the island, a view reported by the Bank of Jamaica the first 40 years 1961-2000 pg.4
But, as the BOJ recognized, this arrangement gave a currency board no discretion regarding the external value of the currency vis-a vis other currencies. It prevented the country from responding independently to external shocks. Monetary management was external and costly since the system required 100% backing of the currency with assets held in sterling, and moreso, at a fixed rate of exchange.


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