And most local economists reckon that currency stability is more important than monetary-policy flexibility.
Three countries Bulgaria, Latvia and Lithuania have currency pegs, meaning little monetary-policy flexibility.
The Federal Reserve has conducted monetary policy with skill and flexibility.
Letting its currency, the renminbi, appreciate would give China's central bank more flexibility in monetary policy and help stimulate domestic demand and consumption, Mr. Bernanke said.
What is more, the argument continues, Hong Kong would gain much-needed flexibility in monetary policy.The peg's defenders counter, first, that devaluation would inflict new, perhaps worse, pain and possibly instability.
(Increasing the reserve requirement is a form of monetary tightening as it reduces liquidity in the banking system as well as the lending base of the commercial banking sector).The central bank's lack of flexibility on monetary policy and the absence of sophisticated monetary tools have also made it difficult to manage the avalanche of liquidity generated by record oil earnings.
Argentina's international competitiveness has been undermined by devaluation in neighboring Brazil and by the weakness of the euro; domestic demand has fallen as consumers and companies lose confidence; but because the currency board allows no flexibility in monetary policy, policy makers cannot respond, Greenspan-style, by opening the monetary spigots.
But by experimenting, and showing some hesitation about restraining the economy through higher interest rates as the NAIRU draws nigh, we might learn a little more about the depth of the waters and possibly become better swimmers".Mr Friedman would doubtless regard this plea for flexibility in monetary policy with disdain.
One difficulty is that a fragile banking system limits a central bank's flexibility on monetary policy, making it harder to raise interest rates.It is no coincidence that some of the most severe banking meltdowns of the past 20 years or so have been preceded by economic shocks, including wild swings in asset prices and exchange-rate fluctuations.
In particular, the bargaining power of banks could explain why the lending rates exhibit downward rigidity to a monetary policy rate cut and upward flexibility to a monetary policy rate hike.
