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The stabilization properties of fixed and floating exchange rate regimes

  • Keith Pilbeam

    (City University, UK)

Registered author(s):

    This paper investigates the price and output stabilization properties of fixed and floating exchange rates using a small open economy model. The performance of the two regimes is compared in the face of money demand, aggregate demand and aggregate supply shocks. It is shown that the ranking of the two regimes is extremely sensitive to the weighting of the objective function as between price and output stability, the type of shock impinging upon the economy, the values of structural parameters of the economy and institutional features such as the degree of wage indexation within the economy. The results obtained suggest that estimates of the income elasticity of money demand, the elasticity of aggregate demand to changes in both the real exchange rate and the real interest rate, and the degree of openness of the economy are likely to be important to policymakers when making the choice of exchange rate regime. Neither regime can be said to be dominant in all circumstances. Copyright © 2004 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/ijfe.235
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    Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

    Volume (Year): 9 (2004)
    Issue (Month): 2 ()
    Pages: 113-123

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    Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:2:p:113-123
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    1. Jacob A. Frenkel & Joshua Aizenman, 1983. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.
    2. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers 838, C.E.P.R. Discussion Papers.
    3. Turnovsky, Stephen J., 1984. "Exchange market intervention under alternative forms of exogenous disturbances," Journal of International Economics, Elsevier, vol. 17(3-4), pages 279-297, November.
    4. Joshua Aizenman & Jacob A. Frenkel, 1984. "Optimal Wage Indexation, Foreign-Exchange Intervention and Monetary Policy," NBER Working Papers 1329, National Bureau of Economic Research, Inc.
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