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Real Effects of Collapsing Exchange Rate Regimes: An Application to Mexico

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  • Osakwe, Patrick
  • Schembri, Lawrence

Abstract

This paper examines the impact of a collapsing exchange rate regime on output in an open economy in which shocks to capital flows and exports predominate. A sticky-price rational expectations model is used to compare the variability of output under the collapsing regime to that under alternative fixed and flexible regimes. Output is found to be most stable under a flexible rate. A counterfactual exercise is performed for Mexico, using the parallel market exchange rate as a proxy for the shadow flexible rate. The main finding is that, had Mexico been on a flexible rate for the past two decades, instead of a series of collapsing regimes, the variance of real output would have been reduced by half.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 99-10.

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Length: 41 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bca:bocawp:99-10

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Keywords: Exchange rates;

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References

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  1. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  2. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  3. Inci Ötker & Ceyla PazarbaÅŸioÄlu, 1996. "Speculative attacks and currency crises: The Mexican experience," Open Economies Review, Springer, vol. 7(1), pages 535-552, March.
  4. Pierre-Richard Agenor & Jagdeep S. Bhandari & Robert P. Flood, 1991. "Speculative Attacks and Models of Balance-of-Payments Crises," NBER Working Papers 3919, National Bureau of Economic Research, Inc.
  5. Laidler, David, 1999. "The Exchange Rate Regime and Canada's Monetary Order," Working Papers 99-7, Bank of Canada.
  6. A. James Meigs, 1997. "Mexican Monetary Lessons," Cato Journal, Cato Journal, Cato Institute, vol. 17(1), pages 35-72, Spring/Su.
  7. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  8. Rudiger Dornbusch & Alejandro Werner, 1994. "Mexico: Stabilization, Reform, and No Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 253-316.
  9. Robert P. Flood & Robert J. Hodrick, 1985. "Real Aspects of Exchange Rate Regime Choice with Collapsing Fixed Rates," NBER Working Papers 1603, National Bureau of Economic Research, Inc.
  10. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  11. Sebastian Edwards, 1997. "The Mexican Peso Crisis? How Much Did We Know? When Did We Know It?," NBER Working Papers 6334, National Bureau of Economic Research, Inc.
  12. Patrick Osakwe & Lawrence Schembri, 1998. "Currency crises and fixed exchange rates in the 1990s: A review," Bank of Canada Review, Bank of Canada, vol. 1998(Autumn), pages 23-38.
  13. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  14. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
  15. Goldberg, Linda S., 1991. "Collapsing exchange rate regimes: shocks and biases," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 252-263, June.
  16. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  17. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  18. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  19. Inci Ötker & Ceyla Pazarbasioglu, 1995. "Speculative Attacks and Currency Crises," IMF Working Papers 95/112, International Monetary Fund.
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Citations

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Cited by:
  1. Agbeyegbe, Terence D. & Osakwe, Patrick N., 2005. "Real exchange rate volatility and the choice of regimes in emerging markets," Journal of Asian Economics, Elsevier, vol. 15(6), pages 1005-1022, January.
  2. Giugale, Marcelo & Korobow, Adam, 2000. "Shock persistence and the choice of foreign exchange regime - an empirical note from Mexico," Policy Research Working Paper Series 2371, The World Bank.
  3. Bussière, Matthieu & Saxena, Sweta C. & Tovar, Camilo E., 2012. "Chronicle of currency collapses: Re examining the effects on output," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 680-708.
  4. Chantal Dupasquier & Patrick N. Osakwe & Shandre M. Thangavelu, 2005. "Choice of Monetary and Exchange Regimes in ECOWAS : An Optimum Currency Area Analysis," Macroeconomics Working Papers 22570, East Asian Bureau of Economic Research.
  5. Murray, John & Schembri, Lawrence & St-Amant, Pierre, 2003. "Revisiting the case for flexible exchange rates in North America," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 207-240, August.
  6. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity for Developing and Developed Countries. What can we Learn from Non-Stationary Panel Data Models?," CESifo Working Paper Series 2255, CESifo Group Munich.
  7. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
  8. Ella Oyono, Dieudonné, 2006. "Effets réels des régimes de change dans les pays en développement," L'Actualité Economique, Société Canadienne de Science Economique, vol. 82(3), pages 319-340, septembre.
  9. Kevin X.D. Huang & Thaneepanichskul Suchada, 2003. "Sources of Exchange Rate Fluctuations: The Cases of Mexico and Thailand in the Aftermaths of their Recent Currency Crises," Annals of Economics and Finance, Society for AEF, vol. 4(2), pages 375-400, November.
  10. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.
  11. Chantal Dupasquier & Patrick N. Osakwe & Shandre M. Thangavelu, 2005. "Choice of Monetary and Exchange Regimes in ECOWAS: An Optimum Currency Area Analysis," SCAPE Policy Research Working Paper Series 0510, National University of Singapore, Department of Economics, SCAPE.
  12. Ibrahim Chowdhury, 2004. "Sources of exchange rate fluctuations: empirical evidence from six emerging market countries," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 697-705.

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