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Fixed versus flexible exchange rates: Evidence from developing countries

  • Hoffmann, Mathias

This paper investigates the formalisation that in a small open economy flexible exchange rates act as a 'shock absorber' and mitigate the effects of external shocks more effectively. An intertemporal small open economy model with nominal rigidities, in which real shocks generate internal imbalances under fixed and flexible exchange rates, is laid out. The role of world interest rate and world output shocks in driving output, trade imbalances and real exchange rate fluctuations is investigated. Using a sample of 38 developing countries, the paper assesses whether the responses of real GDP, the trade balance and the real exchange rate to world real interest rate and world output shocks differ across exchange rate regimes.

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Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 05-03.

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Date of creation: 2005
Date of revision:
Handle: RePEc:zbw:cfrwps:0503
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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
  2. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  3. Barro, R.J. & Martin, X.S., 1990. "World Real Interest Rates," RCER Working Papers 227, University of Rochester - Center for Economic Research (RCER).
    • Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  4. Suzanne McCoskey & Chihwa Kao, 1998. "A residual-based test of the null of cointegration in panel data," Econometric Reviews, Taylor & Francis Journals, vol. 17(1), pages 57-84.
  5. Holtz-Eakin, Douglas, 1988. "Testing for individual effects in autoregressive models," Journal of Econometrics, Elsevier, vol. 39(3), pages 297-307, November.
  6. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  8. Obstfeld, Maurice, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," Center for International and Development Economics Research, Working Paper Series qt5t38s42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  9. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
  10. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  11. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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