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Measuring exchange rate flexibility in Europe

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  • Gaetano, D'Adamo

Abstract

In official terms, European countries that are not in the EMU have been showing a polarization of monetary policy regimes in the last fifteen years: either Inflation Targeting or fixed exchange rates. I apply several methods recently developed by the literature to measure exchange rate flexibility to these European countries, in order to see whether such polarization has indeed occurred from a de facto point of view. Using these approaches, I find that the move to Inflation Targeting did bring about higher exchange rate flexibility, but only up to a level that is not comparable to that of the non-European benchmark floaters. Inflation Targeters in Europe also seem to have put some weight on stabilization of the exchange rate vis à vis the euro, after its introduction; fixed exchange rate arrangements, instead, apart from official policy changes, remained mostly stable throughout the last decade.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26612.

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Date of creation: Jul 2009
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Handle: RePEc:pra:mprapa:26612

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Keywords: Exchange Rate Regimes; Fear of Floating; Inflation Targeting;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  2. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  3. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  4. Serven, Luis & Frankel, Jeffrey & Fajnzylber, Eduardo & Schmukler, Sergio, 2000. "Verifying exchange rate regimes," Policy Research Working Paper Series 2397, The World Bank.
  5. Jeffrey A. Frankel, 1992. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Working Papers 4050, National Bureau of Economic Research, Inc.
  6. Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
  7. Dick van Dijk & Haris Munandar & Christian M. Hafner, 2005. "The Euro Introduction and Non-Euro Currencies," Tinbergen Institute Discussion Papers 05-044/4, Tinbergen Institute, revised 08 Jun 2006.
  8. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  9. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
  10. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
  11. Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 308-326, March.
  12. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  13. von Ungern-Sternbert, Thomas, 1987. "Does the Swiss National Bank Stabilize the Swiss Franc Exchange Rates?," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(1), pages 105-13, January.
  14. Samuel Reynard, 2008. "What Drives the Swiss Franc?," Working Papers 2008-14, Swiss National Bank.
  15. Frankel, Jeffrey & Wei, Shang-Jin, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of The Techniques for Inferring Flexibility and Basket Weights," Working Paper Series rwp08-026, Harvard University, John F. Kennedy School of Government.
  16. Clarida, Richard H, 2001. "The Empirics of Monetary Policy Rules in Open Economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 315-23, October.
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