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Fewer Monies, Better Monies

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  • Rudi Dornbusch

Abstract

In the aftermath of emerging market crises from Russia to Asia and Latin America, there is a quest for better monetary arrangements that are more crisis-proof. Fixed rates are out, flexible rates are in with a policy focus on inflation targeting. But there is, of course, the alternative of abolishing exchange rates all together. This paper revisits the issue of dollarization or currency boards to review what arguments in the debate stand up. The case for flexible exchange rates emphasizes the need for a tool to accomplish relative price adjustment. This paper argues that in an intertemporal perspective most shocks require financing in the capital market rather than adjustment. Moreover, countries frequently do not use their flexible rate to play a cyclical role and, as a result, only a pay a premium for the option to depreciate but do not take advantage of the flexibility; on the contrary, they engineer systematic overvaluation in the context of inflation targeting.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 2 (May)
Pages: 238-242

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:2:p:238-242

Note: DOI: 10.1257/aer.91.2.238
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  1. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR & CES & MSH, vol. 15(31), pages 269-335, October.
  2. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  3. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
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