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The dynamics of exchange rate regimes: Fixes, floats, and flips

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  • Klein, Michael W.
  • Shambaugh, Jay C.

Abstract

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the "mirage" view that pegs do not really peg with the "fear of floating" view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the "mirage" view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the "fear of floating" view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 75 (2008)
Issue (Month): 1 (May)
Pages: 70-92

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Handle: RePEc:eee:inecon:v:75:y:2008:i:1:p:70-92

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Hans Genberg & Alexander K. Swoboda, 2004. "Exchange-Rate Regimes: "Does What Countries Say Matter?"," IHEID Working Papers 07-2004, Economics Section, The Graduate Institute of International Studies.
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Citations

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Cited by:
  1. Michael Bleaney & Mo Tian, . "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Discussion Papers 11/06, University of Nottingham, School of Economics.
  2. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró-Alcalde, José Luis, 2009. "What Lies Beneath the Euro's Effect on Financial Integration? Currency Risk, Legal Harmonization, or Trade?," CEPR Discussion Papers 7314, C.E.P.R. Discussion Papers.
  3. Paul R. Bergin & Ching-Yi Lin, 2008. "Exchange Rate Regimes and the Extensive Margin of Trade," NBER Working Papers 14126, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
  5. Tamgac, Unay, 2013. "Duration of fixed exchange rate regimes in emerging economies," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 439-467.
  6. Elena Andreou & Maria Matsi & Andreas Savvides, 2013. "Stock and Foreign Exchange Market Linkages in Emerging Economies," University of Cyprus Working Papers in Economics 01-2013, University of Cyprus Department of Economics.
  7. Dorn, Sabrina & Egger, Peter H., 2013. "Fixed currency regimes and the time pattern of trade effects," Economics Letters, Elsevier, vol. 119(2), pages 120-123.
  8. Joseph Joyce, 2011. "Financial Globalization and Banking Crises in Emerging Markets," Open Economies Review, Springer, vol. 22(5), pages 875-895, November.
  9. Christoph Fischer, 2011. "Currency blocs in the 21st century," Globalization and Monetary Policy Institute Working Paper 87, Federal Reserve Bank of Dallas.
  10. Graham Bird & Alex Mandilaras & Helen Popper, 2012. "Explaining Shifts in Exchange Rate Regimes," School of Economics Discussion Papers 1312, School of Economics, University of Surrey.

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