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Trade and Financial Interdependence Under Flexible Exchange Rates: The Pacific Area

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  • Jorge Braga de Macedo

Abstract

This paper analyses policy interdependence under flexible exchange rates and its implications for middle-income countries in the Pacific area. In the first part of the paper, the consequences of strategic behavior among industrial countries are illustrated by means of a simple diagram. It is argued that in the absence of incentives to coordinate macroeconomic policies among major countries, exchange rates will tend to be volatile. Evidence on the world value of the dollar in the flexible rate period is then presented and interpreted.The second part describes exchange rate policies in the Pacific area. It is found that the widespread policy of pegging to the U.S. dollar has implied occasional large devaluations against the numeraire (Korea, Taiwan, Thailand, Philippines and Indonesia). An alternative, which requires higher Pacific trade and financial interdependence than the one prevailing during the last decade, would be a joint float along the lines of the policies seemingly pursued by Malaysia and Singapore.The two-country macroeconomic model presented in the Appendix can be used to assess the costs and benefits of policy coordination both at the world and at the regional level.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1517.

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Date of creation: Dec 1984
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Publication status: published as de Macedo, Jorge Braga. "Trade and Financial Interdependence Under Flexible Exchange rates: The Pacific Area." Pacific Growth and Financial Interdependence, edited by Augustine H. H. Tan and Basant Kapur, pp. 277-291. Sydney, Australia: Allen Unwin Australia Pty Ltd, 1986.
Handle: RePEc:nbr:nberwo:1517

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  1. R. Dornbusch, 1982. "Equilibrium and Disequilibrium Exchange Rates," Working papers 309, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Kenneth S. Rogoff, 1983. "Productive and counterproductive cooperative monetary policies," International Finance Discussion Papers 233, Board of Governors of the Federal Reserve System (U.S.).
  3. Matthew B. Canzoneri & Jo Anna Gray, 1983. "Two essays on monetary policy in an interdependent world," International Finance Discussion Papers 219, Board of Governors of the Federal Reserve System (U.S.).
  4. Pentti J. K. Kouri & Jorge Braga De Macedo, 1978. "Exchange Rates and the International Adjustments Process," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 111-158.
  5. Gilles Oudiz & Jeffrey Sachs, 1984. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Working Papers 1417, National Bureau of Economic Research, Inc.
  6. Pentti J.K. Kouri & Jorge B. de Macedo, 1978. "Exchange Rates and the International Adjustment Process," Cowles Foundation Discussion Papers 488, Cowles Foundation for Research in Economics, Yale University.
  7. Jacob A. Frenkel, 1983. "International Liquidity and Monetary Control," NBER Working Papers 1118, National Bureau of Economic Research, Inc.
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