Exchange Rate Policy in Jamaica: A Search for Fiscal prudence and ‘Reasonable Men’

Any consideration of a return to a peg by Jamaica is not an exercise in textbook abstraction nor can it be the result of a simple comparison of Jamaica and Barbados in 2010. A fuller historical comparative analysis will conclude that stronger macroeconomic results in Barbados are due to greater sustained commitment to fiscal prudence that also guaranteed the preservation of peg and parity.

In early 2010, Jamaica’s foreign exchange rate is flexibly determined, and foreign exchange is distributed in an “interbank market”. Beyond licensing, regulation and data capture, the Bank of Jamaica (BOJ) intervenes to sell foreign exchange to “lean against” depreciation or buy foreign exchange to moderate appreciation and increase official reserves. This identifies the foreign exchange system as a “managed float”. The process of managing the foreign exchange market is very demanding of academic and technical capability and is extremely data-intensive.

Jamaica, from its transition from colonialism to the present, has employed a wide variety of foreign exchange market systems. Prior to 1990, Jamaica’s experience had included exchange rate pegs to sterling and then the United States dollar, dual exchange rates, crawling pegs, retained accounts and “no funds licenses”, multiple exchange rates, an auction system (where bidders paid the clearing rate) a modified “Dutch auction” system (where bidders paid the rate they bid) and an ”allocation” fixed rate system from 1989-1990. From the mid 1970s however, exchange systems and stability have been negatively affected by an inability to sustain prudent fiscal management.


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