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On the choice of the exchange-rate regimes

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  • Chien Nan Wang
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    Abstract

    This paper utilizes recent research developments in portfolio balance theory and in real exchange-rate instability to synthesize, update, and test the optimum currency area (OCA) theory. Four hypotheses, capturing the central features of the OCA theory, are advanced and tested in a multinomial-logit setup. the empirical results establish the linkage between a fixed rate and financial integration, trade integration, plus inflation convergence. the Mundell-Fleming ranking of regime is refuted in a fundamental way. these findings are applied to a discussion of European monetary integration, in relation to both its final objective and its intermediate procedure.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9002.

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    Date of creation: 1990
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    Handle: RePEc:fip:fedcwp:9002

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    Keywords: Foreign exchange rates;

    References

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    1. Martin J. Bailey & George S. Tavlas, 1988. "Trade and Investment under Floating Rates: The U.S. Experience," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 8(2), pages 421-449, Fall.
    2. Thursby, Jerry G & Thursby, Marie C, 1987. "Bilateral Trade Flows, the Linder Hypothesis, and Exchange Risk," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 488-95, August.
    3. Richard C. Marston, 1983. "Stabilization Policies in Open Economies," NBER Working Papers 1117, National Bureau of Economic Research, Inc.
    4. Michael R. Darby & James Lothian, 1989. "The International Transmission of Inflation Afloat," NBER Chapters, in: Money, History, and International Finance: Essays in Honor of Anna J. Schwartz, pages 203-244 National Bureau of Economic Research, Inc.
    5. Jacob A. Frenkel & Morris Goldstein, 1988. "The International Monetary System: Developments and Prospects," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 8(2), pages 285-314, Fall.
    6. Jacob A. Frenkel & Joshua Aizenman, 1983. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.
    7. Michael R. Darby & James R. Lothian & Arthur E. Gandolfi & Anna J. Schwartz & Alan C. Stockman, 1983. "The International Transmission of Inflation," NBER Books, National Bureau of Economic Research, Inc, number darb83-1, July.
    8. Holden, Paul & Holden, Merle & Suss, Esther C, 1979. "The Determinants of Exchange Rate Flexibility: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 327-33, August.
    9. Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
    10. Thomas Willett & Edward Tower, 1970. "Currency areas and exchange-rate flexibility," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 105(1), pages 48-65, September.
    11. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 96(2), pages 207-22, May.
    12. Jacob A. Frenkel & Morris Goldstein, 1988. "The International Monetary System: Developments and Prospects," NBER Working Papers 2648, National Bureau of Economic Research, Inc.
    13. Melvin, Michael, 1985. "The Choice of an Exchange Rate System and Macroeconomic Stability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(4), pages 467-78, November.
    14. Stockman, Alan C. & Stockman, Alan C., 1983. "Real exchange rates under alternative nominal exchange-rate systems," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(2), pages 147-166, August.
    15. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
    16. Marston, Richard C., 1985. "Stabilization policies in open economies," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 17, pages 859-916 Elsevier.
    17. Michael D. Bordo & Anna J. Schwartz, 1988. "Transmission of Real and Monetary Disturbances under Fixed and Floating Rates," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 8(2), pages 451-475, Fall.
    18. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
    19. Rudiger Dornbusch, 1988. "New Directions for Research," NBER Chapters, in: Misalignment of Exchange Rates, pages 299-308 National Bureau of Economic Research, Inc.
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