Although a fixed nominal exchange rate regime acts as a nominal anchor it may not achieve domestic price stability. Monetary policy cannot target the exchange rate and domestic prices at the same time they are jointly determined. To manage inflation, the exchange rate has to be floating and price stability can be achieved by either discretion or by adhering to rules. There are a number of rules such as the Taylor rule (Taylor, 1993), where the central bank responds to deviation of inflation from a specified target level, demand, and possibly the current growth rate; targeting the price level, fixing the money growth rate (Friedman, 1968), or nominal GDP targeting (McCallum, 1988). We show that any of these policies in Qatar would have resulted in stable prices but with either higher interest rate or lower rate of growth of money that otherwise observed.


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