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Monetary regime choices for a semi-open country

  • Jeffrey A. Frankel

This paper considers regime choices facing relatively small, trade-oriented, financially liberalizing, rapidly growing countries such as the East Asian NICs. The classic question of fixed versus flexible exchange rates is considered first. Of the many factors that determine whether the advantages of fixed rates justify the loss of monetary independence, all depend on the openness of the country. One example is the advantage that stable exchange rates promote trade; the magnitude of this effect is estimated in this paper. Another example is the advantage that a fixed exchange rate can serve as a nominal anchor to monetary policy. The second half of the paper reviews the recent literature on monetary rules versus discretion, and then considers four alternative candidates for the nominal anchor for monetary policy: the money supply, nominal GNP, price level, and exchange rate. It is argued that nominal GNP dominates the money supply in general, and dominates the other two candidates under certain conditions.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 93-02.

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Date of creation: 1993
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Handle: RePEc:fip:fedfpb:93-02
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  1. Shantayanan Devarajan & Dani Rodrik, 1991. "Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa," NBER Working Papers 3727, National Bureau of Economic Research, Inc.
  2. Takagi, Shinji, 1988. "A basket peg policy: Operational issues for developing countries," World Development, Elsevier, vol. 16(2), pages 271-279, February.
  3. Jeffrey A. Frankel., 1993. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," Center for International and Development Economics Research (CIDER) Working Papers C93-024, University of California at Berkeley.
  4. Jeffrey A. Frankel and Menzie Chinn., 1991. "The Stabilizing Properties of a Nominal GNP Rule in an Open Economy," Economics Working Papers 91-166, University of California at Berkeley.
  5. Helmut Reisen & Axel Trotsenburg, 1988. "Should the Asian NICs peg to the yen?," Intereconomics- Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 23(4), pages 172-177, July.
  6. Bayoumi, Tamim & Eichengreen, Barry, 1993. "One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World," Center for International and Development Economics Research (CIDER) Working Papers 233213, University of California-Berkeley, Department of Economics.
  7. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  8. Rudiger Dornbusch & Sebastian Edwards, 1991. "Introduction to "The Macroeconomics of Populism in Latin America"," NBER Chapters, in: The Macroeconomics of Populism in Latin America, pages 1-4 National Bureau of Economic Research, Inc.
  9. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Department of Economics, Working Paper Series qt4gf4d2hc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Frankel, Jeffrey A., 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," Center for International and Development Economics Research (CIDER) Working Papers 233179, University of California-Berkeley, Department of Economics.
  11. Jeffrey A. Frankel and Norbert Funke., 1994. "A Two-Country Analysis of International Targeting of Nominal GNP," Center for International and Development Economics Research (CIDER) Working Papers C94-035, University of California at Berkeley.
  12. Rudiger Dornbusch & Sebastian Edwards, 1991. "The Macroeconomics of Populism in Latin America," NBER Books, National Bureau of Economic Research, Inc, number dorn91-1.
  13. Bayoumi, Tamim & Eichengreen, Barry, 1993. "Macroeconomic Adjustment under Bretton Woods and the Post-Bretton-Woods Float: An Impulse-Response Analysis," Center for International and Development Economics Research (CIDER) Working Papers 233178, University of California-Berkeley, Department of Economics.
  14. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  15. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
  16. Takatoshi Ito, 1989. "Is the Bank of Japan a Closet Monetarist? Monetary Targeting in Japan, 1978-1988," NBER Working Papers 2879, National Bureau of Economic Research, Inc.
  17. Robert J. Barro, 1989. "A Cross-Country Study of Growth, Saving, and Government," NBER Working Papers 2855, National Bureau of Economic Research, Inc.
  18. Sung Y. Kwack, 1992. "Monetary control, sterilization, and exchange rate policy: Korea during the period of current account surpluses, 1986-1990," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  19. Tamim Bayoumi and Barry Eichengreen., 1993. "One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World," Center for International and Development Economics Research (CIDER) Working Papers C93-030, University of California at Berkeley.
  20. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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