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The potential consequences of alternative exchange rate regimes: A study of three candidate regions

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Author Info
Eduard Hochreiter (Oesterreichische Nationalbank, Austria)
Anton Korinek (Columbia University, USA)
Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre on Modern Europe, UK)

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Abstract

This paper examines the macroeconomic consequences of selecting alternative exchange rate regimes of countries in three regions. In particular, it studies whether Austria, the Netherlands, Canada and New Zealand made the right monetary regime choices between 1970 and 2000. We focus on the role of asymmetric shocks as a core determinant for the evaluation of various monetary regimes by studying the impact of a hard peg, a full monetary union, or floating exchange rates (with or without inflation targeting) on selected macroeconomic variables. Estimates of structural VARs are used to ascertain if the countries under review meet the essential ingredients of an Optimum Currency Area (OCA) and thus are candidates for a monetary union. Counterfactual experiments help to study economic outcomes had these countries pursued alternative monetary strategies. We conclude that a floating regime with inflation targeting is best for Canada, a monetary union with Australia is the best course of action for New Zealand, and monetary union is the appropriate choice for the Netherlands while there are reasons to believe that Austria might have been better off with a floating regime, at least for a time. We also find that good monetary policy is not confined to any particular exchange rate regime and that political and institutional factors weigh heavily in this decision. Copyright © 2003 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.212
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 8 (2003)
Issue (Month): 4 ()
Pages: 327-349
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Handle: RePEc:ijf:ijfiec:v:8:y:2003:i:4:p:327-349

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Uluc Aysun, 2006. "Testing for Balance Sheet Effects in Emerging Market Countries," Working papers 2006-28, University of Connecticut, Department of Economics. [Downloadable!]
  2. Alexius, Annika & Post, Erik, 2005. "Exchange Rates and Asymmetric Shocks in Small Open Economies," Working Paper Series 2005:10, Uppsala University, Department of Economics. [Downloadable!]
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