Exchange Rate Volatility Under Peg; Do Trade Patterns Matter?
This paper assesses the role of trade patterns in shaping the volatility of the effective exchange rate under two alternative peg regimes: a hard peg to a single currency and a peg to a basket of currencies. I link the changes in the nominal effective exchange rate of a pegged currency to the fluctuations of its anchor vis-a-vis other major currencies, with an emphasis on the dynamics of trade patterns. In an application to the WAEMU (West African Economic and Monetary Union), I find that the nominal effective exchange rate of the union was twice as volatile under the hard peg to the euro as it would have been under a hypothetical basket peg over the past decade. This result was driven by the substantial shifts that occurred in WAEMU trade patterns, away from euro area countries and toward the ?"BICs" (Brazil, India, and China). These findings suggest that policymakers should pay as much attention to the type of peg as to pegging in itself, with a particular focus on the dynamics of trade patterns.
|Date of creation:||01 Mar 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
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.:
- Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004.
"Evolution and Performance of Exchange Rate Regimes,"
IMF Occasional Papers
229, International Monetary Fund.
- Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
- Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2009.
"Exchange rate volatility and productivity growth: The role of financial development,"
Journal of Monetary Economics,
Elsevier, vol. 56(4), pages 494-513, May.
- Aghion, Philippe & Bacchetta, Philippe & Ranciere, Romain & Rogoff, Kenneth S., 2009. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Scholarly Articles 12490419, Harvard University Department of Economics.
- Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," NBER Working Papers 12117, National Bureau of Economic Research, Inc.
- Philippe Aghion & Philippe Baccheta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Swiss Finance Institute Research Paper Series 06-16, Swiss Finance Institute.
- Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers 06.02, Swiss National Bank, Study Center Gerzensee.
- Aghion, Philippe & Bacchetta, Philippe & Rancière, Romain & Rogoff, Kenneth, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," CEPR Discussion Papers 5629, C.E.P.R. Discussion Papers.
- Slavi T. Slavov, 2005. "Should small open economies in East Asia put all their eggs in one basket: the role of balance sheet effects," International Finance 0501001, EconWPA.
- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear Of Floating,"
The Quarterly Journal of Economics,
MIT Press, vol. 117(2), pages 379-408, May.
- Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
- Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2006. "Real effective exchange rate volatility and growth: A framework to measure advantages of flexibility vs. costs of volatility," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1149-1169, April.
- Margarida Duarte & Diego Restuccia & Andrea L. Waddle, 2007. "Exchange rates and business cycles across countries," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 57-76.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:12/73. 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: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.