Apr 09, 2011 (LBO) – A dollar peg in the Maldives which is coming under pressure from excess domestic money has hit the airline business and also cut the real wages of expatriate workers, a media report said. Minivan News an online publication said Galaxy Enterprises which is the general sales agent for SriLankan Airlines has stopped selling tickets and referred customers to the airlines website, due to foreign exchange shortages.
Foreign exchange shortages happen when a monetary authority tries to maintain a peg, after printing money beyond its dollar purchases.
To sustain a peg, a monetary authority has to create local money (rufiyaa in the case of Maldives) only by purchasing foreign currency. This matches the domestic money supply with foreign reserves exactly.
However if a monetary authority buys government treasury bills and prints additional money beyond the net dollar inflows, either to lower interest rates or to finance government expenditure, the additional domestic money will pressure the peg.
Economists call the problem the ‘impossible’ trinity of monetary policy objectives. A central bank that tries to target the interest rate by printing money cannot also maintain a f