“Theory of Communicating Vessels”: The Problem of Currency Regulation

Abstract

One of the key dilemmas of modern monetary policy is the issue of currency regulation. In the center of controversy about the optimal approach to monetary policy is the problem of intervention or non-intervention by the central banks in the currency markets and in the process of formation of the exchange rate.

On the one hand most developed countries there is no any significant relationship between exchange rate and inflation, which in terms of monetary regulation defeats the purpose of intervention by central banks in the currency markets. However, in emerging markets, along with a significant relationship between exchange rate and inflation processes and the lack of effective tools of central banks appears necessity to intervene in the formation of exchange rates of national currencies. This in turn deepens the institutional failure and distortion of market mechanisms in economy. Thus, the problem of currency regulation is most acute in developing economies, including in Armenia.

Analysis conducted in this research show significant distortions and inefficiencies currency regulation in Armenia including impact on inflationary processes in the real economy.
On the other hand, against the backdrop of global world financial and currency markets, as well as the instability of world currencies and related consequences, there are supporters of fixed exchange rates. The main argument for fixed exchange rates is primarily a high degree of influence of fluctuations in international exchange rates on monetary systems of the world, and the lack of acceptable diversification of the world currency markets.

All these assign the task of finding the optimum in currency regulation to authors and determine relevance extended research topic.

The basic hypothesis of this study is the idea that the maximum non-interference in the formation of the exchange rate by central banks is the most favorable for stable inflation in the economy.