Monetary policy cannot be used effectively when a country has a fixed exchange rate.

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When a country has a fixed exchange rate, its currency is pegged to another currency or basket of currencies. In such a scenario, the central bank cannot independently use monetary policy tools to influence interest rates or the money supply, as any changes in these variables could lead to the exchange rate deviating from the fixed level. Therefore, a fixed exchange rate regime limits the effectiveness of monetary policy in achieving macroeconomic goals, such as price stability, full employment, or economic growth. However, fiscal policies can still be used to support economic activity and mitigate external shocks.

Monetary Policy Cannot Be Used Effectively When a Country Has