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Can Flexible Exchange Rates Still “Work” In Financially Open Economies?

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  • Ilan GOLDFAJN
  • Gino OLIVARES

Abstract

Recent studies have shown that exchange rates in developing countries have limited flexibility. In this paper we review the existing explanations for this stylized fact, using a simple framework of monetary policy in a world where firms face balance sheet effects and the economy has a high pass-through from depreciation to inflation. We estimate a panel regression using quarterly data in the period 1990–1999 for a sample of 46 countries (19 industrial and 27 developing), and find that the use of the exchange rate to buffer external shocks depends crucially on (i) on the degree of integration with capital markets, and (ii) the quality of external financing. We conclude that flexible regimes are viable in financially open economies, provided external financing is not based on very volatile capital. This, of course, is dependent on the establishment of credible macroeconomic policies.

Suggested Citation

  • Ilan GOLDFAJN & Gino OLIVARES, 2001. "Can Flexible Exchange Rates Still “Work” In Financially Open Economies?," G-24 Discussion Papers 8, United Nations Conference on Trade and Development.
  • Handle: RePEc:unc:g24pap:8
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    18. repec:idb:wpaper:418 is not listed on IDEAS
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    Cited by:

    1. Carrera, Jorge Eduardo & Cicowiez, Martín & Lacunza, Hernán & Saavedra, Marcelo, 2005. "Interdependencia y regímenes cambiarios en Mercosur: un modelo macroeconómico de equilibrio general computado para su medición
      [Interdependence under different exchange rate regimes in the Mercosur
      ," MPRA Paper 7845, University Library of Munich, Germany, revised 2005.
    2. repec:eee:reveco:v:50:y:2017:i:c:p:196-244 is not listed on IDEAS
    3. Siwei Goo & Reza Siregar, 2009. "Economic Shocks And Exchange Rate As A Shock Absorber In Indonesia And Thailand," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp72, January.

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