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When exchange-rate policy becomes an anchor for monetary policy, it becomes hard to pursue a counter-cyclical monetary policy autonomous of exogenous factors. The significance of

When exchange-rate policy becomes an anchor for monetary policy, it becomes hard to pursue a counter-cyclical monetary policy autonomous of exogenous factors. The significance of the demand function of money in conducting financial policy under such an atmosphere is no larger than the restriction of monetary policy in concerning the money supply. The role of fiscal policy in Saudi Arabia has an important influence on GDP growth, money demand/supply and structural inflation. Exchange rate commitments induce a shift from a money supply rule to an interest rate rule and a much-constrained scale for unbiased action inside the control of money (the policy restriction in Saudi Arabia). From a policy standpoint, determining whether the demand for money balances is driven by long-term forces, or will be subject to volatile shifts, continues to be an exciting educational exercise but is not a central fear in the conduct of monetary policy. Although a well-developed financial structure is normally of crucial importance for the transmission mechanism, this case there are some limitations in Saudi Arabia because the domestic economy is not interest rate vulnerable."

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