Regulation of the national currency exchange rate in a small and open economy

ENThe article deals with the conditions determining the choice of an exchange rate regime. A special emphasis is placed on the analysis of the type of the exchange rate regime (i.e. fixed or freely floating) which should be chosen by countries with relatively small and open economy. Certain country features, such as economic policy objectives, character of the environment, country structural characteristics and competence of those implementing policies are outlined in the article. The argumentation of the article leads to the conclusion that the characteristics of openness suggest that relatively small and open economies should adopt fixed exchange rate regimes. It is also noted that countries with fixed exchange rate regimes have been most successful in curbing the growth of inflation. Nevertheless, such countries are more vulnerable to external shocks. The functioning of the currency board arrangement in Lithuania is analysed from time perspective. The advantages and shortcomings of the arrangement are presented.It is stated that under the conditions of the currency board arrangement as one of the versions of fixed exchange rate regimes, tasks are divided between fiscal and monetary policies whereby regulation of the economy becomes the domain of the government fiscal policies. Certain references to the global financial system are made and the incompatibility of different objectives or the concept of the "impossible trinity" is pointed out. It is argued that that emerging/transitional economies will split into two groups. One of them will be represented by countries with flexible exchange rates and relatively low level of integration into the global financial markets while the second group will consist of countries, which closely link their economies with currency boards or currency unions and whose financial systems are therefore highly integrated into the global financial markets, and which have significant presence of foreign ownership.