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Exchange Rate: Shock Generator or Shock Absorber?

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  • Maryla Maliszewska
  • Wojciech Maliszewski
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    Abstract

    The paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.

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    File URL: http://www.case-research.eu/upload/publikacja_plik/2339955_272.pdf
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    Bibliographic Info

    Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0272.

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    Length: 33 Pages
    Date of creation: 2004
    Date of revision:
    Handle: RePEc:sec:cnstan:0272

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    Related research

    Keywords: exchange rate regimes; inflation; output volatility;

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    1. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April.
    2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    3. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
    4. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
    5. Thomas Philippon & Jeromin Zettelmeyer & Eduardo Borensztein, 2001. "Monetary Independence in Emerging Markets," IMF Working Papers 01/1, International Monetary Fund.
    6. Sebastian Edwards, 2000. "Interest Rates, Contagion and Capital Controls," NBER Working Papers 7801, National Bureau of Economic Research, Inc.
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