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Real effects of collapsing exchange rate regimes: an application to Mexico

  • Osakwe, Patrick N.
  • Schembri, Lawrence L.

This paper examines the impact of a collapsing exchange rate regime on output in an open economy in which shocks to capital flows and exports predominate. A sticky-price rational expectations model is used to compare the variability of output under the collapsing regime to that under alternative fixed and flexible regimes. Output is found to be most stable under a flexible rate. A counterfactual exercise is performed for Mexico, using the parallel market exchange rate as a proxy for the shadow flexible rate. The main finding is that, had Mexico been on a flexible rate for the past two decades, instead of a series of collapsing regimes, the variance of real output would have been reduced by half.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 57 (2002)
Issue (Month): 2 (August)
Pages: 299-325

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Handle: RePEc:eee:inecon:v:57:y:2002:i:2:p:299-325
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. Inci Ötker & Ceyla PazarbaÅŸioÄlu, 1996. "Speculative attacks and currency crises: The Mexican experience," Open Economies Review, Springer, vol. 7(1), pages 535-552, March.
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  3. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
  4. Laidler, David, 1999. "The Exchange Rate Regime and Canada's Monetary Order," Working Papers 99-7, Bank of Canada.
  5. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
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  8. Sebastian Edwards, 1997. "The Mexican Peso Crisis? How Much Did We Know? When Did We Know It?," NBER Working Papers 6334, National Bureau of Economic Research, Inc.
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  10. Patrick Osakwe & Lawrence Schembri, 1998. "Currency crises and fixed exchange rates in the 1990s: A review," Bank of Canada Review, Bank of Canada, vol. 1998(Autumn), pages 23-38.
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  13. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  14. Goldberg, Linda S., 1991. "Collapsing exchange rate regimes: shocks and biases," Journal of International Money and Finance, Elsevier, vol. 10(2), pages 252-263, June.
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  18. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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