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Exchange Rate Regimes and International Business Cycles

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  • Theptida Sopraseuth

    (Universite d'Evry Val d'Essonne)

Abstract

This paper investigates the impact of exchange rate regimes on international business cycles and focuses on the consequences of membership to the European Monetary System. The volatility puzzle uncovered by Baxter and Stockman [1989, Journal of Monetary Economics 23, 377–401] after assessing the consequences of the Bretton Woods system turns out to be a robust stylized fact: real and nominal exchange rates display a higher volatility under floating rates while the variability of macroeconomic quantities remains unchanged across exchange rate regimes. Besides, there is evidence that fixed rates are associated with enhanced comovement in output, consumption and investment.We find that a two-country model, featuring monopolistic competition, pricing-to-market, and price stickiness, captures all of the empirical features of the data but one; namely the stronger output comovement following the transition to fixed rates. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 2 (April)
Pages: 338-361

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Handle: RePEc:red:issued:v:6:y:2003:i:2:p:338-361

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Keywords: Exchange rate regimes; Monopolistic competition; Price rigidities; Pricing-to-market;

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References

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  1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  2. Jonathan McCarthy, 2000. "Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies," Staff Reports 111, Federal Reserve Bank of New York.
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  7. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9917, Université de Lausanne, Faculté des HEC, DEEP.
  8. Bayoumi, Tamim & Taylor, Mark P, 1995. "Macro-economic Shocks, the ERM, and Tri-polarity," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 321-31, May.
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  12. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
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  16. Monacelli, Tommaso, 2004. "Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy," Journal of International Economics, Elsevier, vol. 62(1), pages 191-217, January.
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Citations

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Cited by:
  1. Cunha, Alexandre B., 2005. "A Direct Proof of the First Welfare Theorem," Insper Working Papers wpe_30, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Lahura, Erick & Vega, Marco, 2013. "Regímenes Cambiarios y Desempeño Macroeconómico: Una Evaluación de la Literatura," Working Papers 2013-006, Banco Central de Reserva del Perú.
  3. Robert Kollmann, 2005. "Macroeconomic effects of nominal exchange rate regimes: new insights into the role of price dynamics," ULB Institutional Repository 2013/7624, ULB -- Universite Libre de Bruxelles.
  4. Duarte, Margarida, 2003. "Why don't macroeconomic quantities respond to exchange rate variability?," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 889-913, May.
  5. Martin Gächter & Aleksandra Riedl & Doris Ritzberger-Grünwald, 2012. "Business Cycle Synchronization in the Euro Area and the Impact of the Financial Crisis," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 33–60.
  6. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2009. "Deutschland im internationalen Konjunkturzusammenhang. Expertise im Auftrag der Bundesregierung," Occasional Reports / Expertisen, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75372.
  7. Bergman, Michael, 2004. "How Similar Are European Business Cycles?," Working Papers 2004:9, Lund University, Department of Economics.
  8. Saadet Kasman & Duygu Ayhan, 2006. "Macroeconomic Volatility under Alternative Exchange Rate Regimes in Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 6(2), pages 37-58.
  9. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer, vol. 53(2), pages 357-382, June.

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