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Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory

  • Alan C. Stockman

This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for balance-of-payments purposes under pegged exchange rates. In particular. these restrictions become more likely during periods of time when countries suffer losses of international reserves than might. without policy changes. lead to a balance-of-payments crisis. This covariation of restrictions with reserve changes implies that real exchange rates will vary less under pegged than under floating exchange rates.

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File URL: http://www.nber.org/papers/w2565.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2565.

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Date of creation: Apr 1988
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Publication status: published as Carnegie-Rochester Conference Series on Public Policy, Vol. 29, pp. 259-294 , (Autumn 1988).
Handle: RePEc:nbr:nberwo:2565
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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