Fear of Floating Needn't Imply Fixed Rates: An OCA Approach to the Operation of Stable Intermediate Currency Regimes
The criteria of the theory of optimum currency areas suggest that many countries are not good candidates for either of the poles of genuinely fixed exchange rates or freely floating exchange rates. Thus, many countries should have an interest in intermediate exchange rate regimes. However, in a world of substantial capital mobility most forms of intermediate exchange rate regimes have proven to be highly crisis prone. This essay argues that the unholy trinity paradigm doesn't imply that intermediate exchange rate regimes are inherently unstable, but rather that exchange rate and monetary policies need to be jointly determined. The difficulties of maintaining such consistency are as much political as economic since temporarily pegged or managed rates create a time inconsistency problem. It is argued that OCA theory provides the framework for determining the appropriate weights and limits on the amount of sterilized intervention to maintain the consistency between exchange rate and monetary policies necessary to avoid currency crises. The paper also considers a number of the issues involved in integrating this approach with the literature on open economy aspects of inflation targeting. Copyright Kluwer Academic Publishers 2003
Volume (Year): 14 (2003)
Issue (Month): 1 (January)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/international+economics/journal/11079/PS2|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A & Rose, Andrew K, 1996.
"The Endogeneity of the Optimum Currency Area Criteria,"
CEPR Discussion Papers
1473, C.E.P.R. Discussion Papers.
- Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
- Svensson, L.E.O., 1998.
"Open-Economy Inflation Targeting,"
638, Stockholm - International Economic Studies.
- Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
- Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
- Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, March.
- Laurence Ball, 1998.
"Policy Rules for Open Economies,"
NBER Working Papers
6760, National Bureau of Economic Research, Inc.
- Laurence Ball, 2002.
"Policy Rules and External Shocks,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 3, pages 047-064
Central Bank of Chile.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Bofinger, Peter & Wollmershäuser, Timo, 2001.
"Managed floating: Understanding the new international monetary order,"
W.E.P. - Würzburg Economic Papers
30, University of Würzburg, Chair for Monetary Policy and International Economics.
- Bofinger, Peter & Wollmershaeuser, Timo, 2001. "Managed Floating: Understanding the New International Monetary Order," CEPR Discussion Papers 3064, C.E.P.R. Discussion Papers.
- Willett, Thomas D & Wolf, Matthias, 1983. "The Vicious Circle Debate: Some Conceptual Distinctions," Kyklos, Wiley Blackwell, vol. 36(2), pages 231-48.
- Dalia S Hakura & Ehsan U. Choudhri, 2001.
"Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?,"
IMF Working Papers
01/194, International Monetary Fund.
- Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
- Barry Eichengreen, 2002.
"Can Emerging Markets Float? Should They Inflation Target?,"
Working Papers Series
36, Central Bank of Brazil, Research Department.
- Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Monetary Integration and Dollarization, chapter 8 Edward Elgar Publishing.
- Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
- William H. Branson & Jacob A. Frenkel & Morris Goldstein, 1990. "International Policy Coordination and Exchange Rate Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number bran90-1, September.
When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:14:y:2003:i:1:p:71-91. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.