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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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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. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1093-1109, December.
  5. Tommaso Monacelli, 1999. "Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy," Boston College Working Papers in Economics, Boston College Department of Economics 437, Boston College Department of Economics, revised 15 Sep 2000.
  6. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
  7. Hairault, Jean-Olivier & Portier, Franck, 1993. "Money, New-Keynesian macroeconomics and the business cycle," European Economic Review, Elsevier, Elsevier, vol. 37(8), pages 1533-1568, December.
  8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles," NBER Working Papers 5876, National Bureau of Economic Research, Inc.
  9. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(1), pages 3-37, August.
  10. 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.
  11. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  12. Luca Dedola & Sylvain Leduc, 2001. "Why is the Business-Cycle Behavior of Fundamentals Alike Across Exchange-Rate Regimes?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 411, Bank of Italy, Economic Research and International Relations Area.
  13. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  14. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  15. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  16. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers, IESE Business School D/475, IESE Business School.
  17. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  18. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 117-214, January.
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Citations

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Cited by:
  1. 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.
  2. Kollmann, Robert, 2005. "Macroeconomic effects of nominal exchange rate regimes: new insights into the role of price dynamics," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(2), pages 275-292, March.
  3. Lahura, Erick & Vega, Marco, 2013. "Regímenes cambiarios y desempeño macroeconómico: Una evaluación de la literatura," Revista Estudios Económicos, Banco Central de Reserva del Perú, Banco Central de Reserva del Perú, issue 26, pages 101-119.
  4. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer, Springer, vol. 53(2), pages 357-382, June.
  5. 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, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75372.
  6. 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, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 6(2), pages 37-58.
  7. Cunha, Alexandre B., 2005. "A Direct Proof of the First Welfare Theorem," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_30, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Duarte, Margarida, 2003. "Why don't macroeconomic quantities respond to exchange rate variability?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(4), pages 889-913, May.
  9. Bergman, Michael, 2004. "How Similar Are European Business Cycles?," Working Papers, Lund University, Department of Economics 2004:9, Lund University, Department of Economics.

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