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Monetary Policy versus Fiscal Policy for Foreign Reserve Stabilisation
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  • Simon Naitram,
  • O'Shannon Vaughan,
  • Justin Carter,
  • Myka Payne
Simon Naitram
University of the West Indies
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O'Shannon Vaughan
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Justin Carter
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Myka Payne
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Abstract

Barbados has traditionally used fiscal policy to maintain the exchange rate peg of $2 BBD to $1 USD through foreign reserve stability. The use of fiscal policy is premised on the assumption of complete openness of the capital account, which would disallow the use of independent monetary policy. However, evidence shows that the Barbados capital account is closed, implying that independent monetary policy is useful. This paper compares the effectiveness of monetary and fiscal policy in maintaining reserve stability.