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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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Related research

Keywords: Dollarization; Currency boards; Currency pegs; Economic models; Exchange rate regimes; Governance; Small states; micro-states; dollarization; currency board; fixed exchange rate; Geweke-Hajivassiliou-Kean Multivariate Simulator;

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References

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  1. Patrick A. Imam, 2008. "Rapid Current Account Adjustments: Are Microstates Different?," IMF Working Papers 08/233, International Monetary Fund.
  2. Patrick A. Imam, 2009. "Introducing the Euro as Legal Tender - Benefits and Costs of Eurorization for Cape Verde," IMF Working Papers 09/146, International Monetary Fund.
  3. 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.
  4. 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.
  5. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  6. H Armstrong, R de Kervenoael, Xiao-Ming Li and R Read, . "A Comparision of the economic performance of different micro-states and between micro-states and larger countries," Working Papers ec9/97, Department of Economics, University of Lancaster.
  7. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
  8. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  9. 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.
  10. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
  11. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  12. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  13. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
  14. Ruggie, John Gerard, 1993. "Territoriality and beyond: problematizing modernity in international relations," International Organization, Cambridge University Press, vol. 47(01), pages 139-174, December.
  15. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
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Citations

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Cited by:
  1. Francis Breedon & Th�rarinn G. P�tursson & Andrew K. Rose, 2011. "Exchange Rate Policy in Small Rich Economies," Working Papers 684, Queen Mary, University of London, School of Economics and Finance.
  2. Nikoloz Gigineishvili, 2011. "Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?," IMF Working Papers 11/176, International Monetary Fund.

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