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The stabilization properties of fixed and floating exchange rate regimes

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  • Keith Pilbeam

    (City University, UK)

Abstract

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.

Suggested Citation

  • Keith Pilbeam, 2004. "The stabilization properties of fixed and floating exchange rate regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 113-123.
    • Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:2:p:113-123
    DOI: 10.1002/ijfe.235
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    References listed on IDEAS

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    1. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
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    6. Frenkel, Jacob A. & Aizenman, Joshua, 1982. "Aspects of the optimal management of exchange rates," Journal of International Economics, Elsevier, vol. 13(3-4), pages 231-256, November.
    7. Chin, Daniel M. & Miller, Preston J., 1998. "Fixed vs. floating exchange rates: A dynamic general equilibrium analysis," European Economic Review, Elsevier, vol. 42(7), pages 1221-1249, July.
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