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Exchange Rate Choices of Microstates

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  • Patrick A. Imam

Abstract

In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/12.

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Length: 48
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/12

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Keywords: Dollarization; Currency boards; Currency pegs; Economic models; Exchange rate regimes; Governance; Small states; micro-states; fixed exchange rate; Geweke-Hajivassiliou-Kean Multivariate Simulator; monetary policy; inflation; central bank; exchange rates; fixed exchange rates; foreign exchange; fixed exchange rate regimes; monetary fund; independent monetary policy; money supply; floating exchange rate; flexible exchange rate; exchange rate choices; exchange rate volatility; exchange rate policy; exchange rate systems; monetary authorities; monetary economics; monetary growth; floating exchange rates; flexible exchange rates; monetary base; exchange rate arrangement; monetary union; exchange rate depreciation; exchange rate risk; flexible exchange rate regimes; currency risk; currency depreciation; exchange rate arrangements; nominal exchange rate; exchange rate fluctuations; fixed exchange rate systems; exchange markets; exchange rate determination; exchange rate float; currency convertibility; exchange arrangements; currency areas; fixed exchange rate pegs; exchange rate devaluation; monetary expansion; foreign exchange markets; monetary arrangement; hard currency; monetary transmission mechanism; foreign investment; de facto exchange rate regimes; exchange rate appreciation; monetary authority; exchange rate changes; exchange restrictions; reserve requirement; monetary discipline; monetary policy regimes; basket of currencies; nominal exchange rate depreciation; history of exchange rate; exchange rate risks; aggregate demand; exchange rate flexibility; fixed exchange rate countries; exchange rate pass;

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References

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  1. Ruggie, John Gerard, 1993. "Territoriality and beyond: problematizing modernity in international relations," International Organization, Cambridge University Press, vol. 47(01), pages 139-174, December.
  2. James R. Hines Jr. & Lawrence H. Summers, 2009. "How Globalization Affects Tax Design," NBER Chapters, in: Tax Policy and the Economy, Volume 23, pages 123-157 National Bureau of Economic Research, Inc.
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  4. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
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  7. Gaetano Antinolfi & Todd Keister, 2001. "Dollarization as a monetary arrangement for emerging market economies," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 29-40.
  8. Patrick A. Imam, 2009. "Introducing the Euro As Legal Tender," IMF Working Papers 09/146, International Monetary Fund.
  9. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
  10. Atish R. Ghosh & Holger C. Wolf, 1994. "How Many Monies? A Genetic Approach to Finding Optimum Currency Areas," NBER Working Papers 4805, National Bureau of Economic Research, Inc.
  11. Armstrong, H. & De Kervenoael, R. J. & Li, X. & Read, R., 1998. "A comparison of the economic performance of different micro-states, and between micro-states and larger countries," World Development, Elsevier, vol. 26(4), pages 639-656, April.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  13. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  14. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  15. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
  16. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
  17. Patrick A. Imam, 2008. "Rapid Current Account Adjustments," IMF Working Papers 08/233, International Monetary Fund.
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Cited by:
  1. Francis Breedon & Thórarinn Pétursson & Andrew Rose, 2012. "Exchange Rate Policy in Small Rich Economies," Open Economies Review, Springer, vol. 23(3), pages 421-445, July.
  2. Nikoloz Gigineishvili, 2011. "Determinants of Interest Rate Pass-Through," IMF Working Papers 11/176, International Monetary Fund.

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