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Fixed versus Flexible Exchange Rates: Evidence from Developing Countries

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  • MATHIAS HOFFMANN
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    Abstract

    This paper investigates the hypothesis that in a small open economy flexible exchange rates act as a 'shock absorber' and mitigate the effects of external shocks more effectively than fixed exchange rate regimes. Using a sample of 42 developing countries, the paper assesses whether the responses of real GDP, the trade balance and the real exchange rate to world output and world real interest rate shocks differ across exchange rate regimes. The paper shows that there are significant differences in the variability of macroeconomic aggregates under fixed and flexible exchange rate regimes. Copyright (c) The London School of Economics and Political Science 2007.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0335.2006.00564.x
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    Bibliographic Info

    Article provided by London School of Economics and Political Science in its journal Economica.

    Volume (Year): 74 (2007)
    Issue (Month): 295 (08)
    Pages: 425-449

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    Handle: RePEc:bla:econom:v:74:y:2007:i:295:p:425-449

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    Cited by:
    1. Kang, Hyunju, 2013. "Behind the scenes of abandoning a fixed exchange rate regime," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3145-3156.
    2. Drazen Derado, 2009. "Financial Integration and Financial Crisis: Croatia Approaching The EMU," Financial Theory and Practice, Institute of Public Finance, vol. 33(3), pages 299-328.
    3. Towbin, Pascal & Weber, Sebastian, 2013. "Limits of floating exchange rates: The role of foreign currency debt and import structure," Journal of Development Economics, Elsevier, vol. 101(C), pages 179-194.
    4. Jian-Ye Wang & Nisreen H. Farhan & Amar Shanghavi & Márcio Valério Ronci & Misa Takebe, 2008. "The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe," IMF Working Papers 08/118, International Monetary Fund.
    5. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, vol. 34(C), pages 5-14.
    6. Duncan, Roberto, 2014. "Institutional quality, the cyclicality of monetary policy and macroeconomic volatility," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 113-155.
    7. Lahura, Erick & Vega, Marco, 2013. "Regímenes cambiarios y desempeño macroeconómico: Una evaluación de la literatura," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 101-119.
    8. Joseph D. ALBA & Wai-Mun CHIA & Donghyun PARK, 2011. "Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia," Working Papers DP-2011-09, Economic Research Institute for ASEAN and East Asia (ERIA).
    9. Olivier Gervais & Lawrence Schembri & Lena Suchanek, 2011. "External Stability, Real Exchange Rate Adjustment and the Exchange Rate Regime in Emerging-Market Economies," Discussion Papers 11-5, Bank of Canada.
    10. Uluc Aysun & Ryan Brady & Adam Honig, 2009. "Financial Frictions and Monetary Transmission Strength: A Cross-Country Analysis," Working papers 2009-24, University of Connecticut, Department of Economics, revised Jun 2010.
    11. Aysun, Uluc, 2008. "Automatic stabilizer feature of fixed exchange rate regimes," Emerging Markets Review, Elsevier, vol. 9(4), pages 302-328, December.
    12. Jaroslava Durčáková, 2011. "Foreign Exchange Rate Regimes and Foreign. Exchange Markets in Transitive Economies," Prague Economic Papers, University of Economics, Prague, vol. 2011(4), pages 309-328.

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