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Exchange Rate Regime Choice and Country Characteristics: an Empirical Investigation into the Role of Openness

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Author Info
Nicolas Magud () (University of Oregon Economics Department)
Abstract

In choosing an exchange rate regime for a small open economy, the common wisdom (Friedman (1953), Meade (1950)) calls for a °oating regime to outperform a peg because of the ability of the former to cope with relative price changes without major output effects. With balance sheet effects in mind, doubts have been raised about it, though. I test for this, using a near VAR approach. The 32 country sample for the period 1980-2001 was split according to the degree of openness of the economy. The results show that for relatively open economies the common wisdom holds; on the contrary, for relatively closed economies it does not. In fact, the evidence documents that to absorb real shock, fixed exchange rate regimes perform better for relatively closed economies, while flexible exchange rate regimes do a better job for relatively open economies.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2004-15.

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Length: 27
Date of creation: 01 May 2002
Date of revision: 20 Oct 2004
Handle: RePEc:ore:uoecwp:2004-15

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Related research
Keywords: Exchange Rate Regimes Openness near VAR

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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