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Volatility of Shocks and Degree of Exchange Rate Flexibility

Author

Listed:
  • Jean-Pierre Allegret

    () (Groupe d Analyse et de Theorie Economique (UMR 5824 CNRS, Universites Lyon 2 et Lyon 1,ENS-LSH), France)

  • Mohamed Ayadi

    () (Institut Superieur de Gestion, Universite de Tunis III, Tunisia)

  • Leila Haouaoui

    () (Institut Superieur de Gestion, Universite de Tunis III, Tunisia)

Abstract

During the 90s emerging markets have been hit by recurrent exchange rate crises. Almost all these countries shared a common characteristic: they adopted in previous years soft pegs, the so-called intermediate exchange rate regimes. International institutions and academic economists interpreted this intrinsic fragility of soft pegs as a consequence of the increasing international capital mobility. From this perspective, the exchange-rate regime is seen as constrained by the monetary policy trilemma, which imposes a stark trade-off among exchange stability, monetary independence, and capital market openness. Soft pegs seem incompatible with international financial integration. As a result, a new consensus appeared: the choice of domestic authorities is limited to corner solutions: hard pegs on the one side; independent floating on the other side. This paper proposes a contribution to the analysis of exchange rate regimes choice by emerging markets. The new consensus is questioned by considering that emerging countries are confronted not in the choice between extreme solutions, but rather with the choice of the degree of fixity or the degree of flexibility- of the exchange rate.

Suggested Citation

  • Jean-Pierre Allegret & Mohamed Ayadi & Leila Haouaoui, 2007. "Volatility of Shocks and Degree of Exchange Rate Flexibility," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(3), pages 271-301, September.
  • Handle: RePEc:voj:journl:v:54:y:2007:i:3:p:271-301
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    References listed on IDEAS

    as
    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, vol. 54(2), pages 387-404, December.
    3. Helene Poirson Ward, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
    4. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
    5. Melvin, Michael, 1985. "The Choice of an Exchange Rate System and Macroeconomic Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 467-478, November.
    6. Weymark, Diana N, 1997. "Measuring the degree of exchange market intervention in a small open economy," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 55-79, February.
    7. 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.
    8. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Emerging markets; Intermediate exchange rate regimes; Corner solutions; Macroeconomic shocks; Optimal flexibility of exchange rate.;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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