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Real Aspects of Exchange Rate Regime Choice with Collapsing Fixed Rates

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  • Robert P. Flood
  • Robert J. Hodrick

Abstract

Typical evaluations of the choice of exchange rate regime employ a criterion function that depends on the real performance of the economy, and they focus on regimes that are expected to last indefinitely. This latter feature is strongly contradicted by the transitory nature of actual regimes.This paper extends the recent literature on collapses of fixed exchange rate regimes with exogenous real sectors to examine how the predictions of two popular models for the determination of some real economic variables must be modified when agents rationally perceive that the fixed rate regime will be transitory. The models studied are simple stochastic versions of the models in Dornbusch (1976) and Flood and Marion (1982).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1603.

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Date of creation: Apr 1985
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Publication status: published as Flood, Robert P. and Robert J. Hodrick. "Real Aspects of Exchange Rate Regime Choice with Collapsing Fixed Rates," Journal of International Economics, Vol. 21, (1986), No. 3/4, pp. 215-232.
Handle: RePEc:nbr:nberwo:1603

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  1. Lapan, Harvey E. & Enders, Walter, 1980. "Random Disturbances and the Choice of Exchange Regimes in an Intergenerational Model," Staff General Research Papers 10824, Iowa State University, Department of Economics.
  2. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  3. Robert P. Flood & Nancy Peregrim Marion, 1980. "The Transmission of Disturbances under Alternative Exchange-Rate Regimeswith Optimal Indexing," NBER Working Papers 0500, National Bureau of Economic Research, Inc.
  4. Robert P. Flood & Peter M. Garber, 1981. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc.
  5. Kimbrough, Kent P., 1983. "The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(1), pages 27-38, April.
  6. Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Intervention in a Small Open Economy," NBER Working Papers 1170, National Bureau of Economic Research, Inc.
  7. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 75(3), pages 402-23, June.
  8. Jonathan Eaton, 1983. "Optimal and Time Consistent Exchange Rate Management in an Overlapping Generations Economy," NBER Working Papers 1196, National Bureau of Economic Research, Inc.
  9. 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.
  10. Cecchetti, Stephen G, 1987. "Indexation and Incomes Policy: A Study of Wage Adjustment in Unionized Manufacturing," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 5(3), pages 391-412, July.
  11. Weber, Warren E, 1981. "Output Variability under Monetary Policy and Exchange Rate Rules," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 733-51, August.
  12. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(4), pages 627-48, August.
  13. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  14. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
  15. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(1), pages 148-66, February.
  16. Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-16, June.
  17. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  18. Karni, Edi, 1983. "On Optimal Wage Indexation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 282-92, April.
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