Choice Of Exchange Rate Research Articles

Exchange Rate Regimes in the ASEAN: Would a Currency Union Outperform the Independent Managed Floating Regimes?

This paper compares the macroeconomic and welfare performances of the currency union against those from the independent managed floating regime using a two open-country DSGE model with the foreign currency denomination of private debt. The model is calibrated on the average data from the five founding members of the ASEAN and the performance of regimes is assessed under the effects of supply and demand shocks. We find that the macroeconomic and welfare performances of the ASEAN economies under the independent managed floating regimes are comparable to those under a currency union. This is explained by the stability of the intra-regional nominal exchange rates arising from the similarity of policy rules under the independent managed floating regimes. Our findings suggest that the choice of exchange rate targeting regimes with coordinated policies for the ASEAN countries would be an effective way to move towards a currency union.

The welfare implications of exchange rate choices in developing agricultural economies

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an estimated open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets and imperfect asset markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor re-allocation upon commodity price volatility. When labor and product markets are not well-developed, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a novel rationale as to why exchange rate targeting is implemented in many developing agricultural economies.

Steady-state entropy: A proposal based on thermodynamic integration

Defining an entropy function out of equilibrium is an outstanding challenge. For stochastic lattice models in spatially uniform nonequilibrium steady states, definitions of temperature T and chemical potential μ have been verified using coexistence with heat and particle reservoirs. For an appropriate choice of exchange rates, T and μ satisfy the zeroth law, marking an important step in the development of steady-state thermodynamics. These results suggest that an associated steady-state entropy S_{th} be constructed via thermodynamic integration, using relations such as (∂S/∂E)_{V,N}=1/T, ensuring that derivatives of S_{th} with respect to energy and particle number yield the expected intensive parameters. We determine via direct calculation the stationary nonequilibrium probability distribution of the driven lattice gas with nearest-neighbor exclusion, the Katz-Lebowitz-Spohn driven lattice gas, and a two-temperature Ising model so that we may evaluate the Shannon entropy S_{S} as well as S_{th} defined above. Although the two entropies are identical in equilibrium (as expected), they differ out of equilibrium; for small values of the drive, D, we find |S_{S}-S_{th}|∝D^{2}, as expected on the basis of symmetry. We verify that S_{th} is not a state function: changes ΔS_{th} depend not only on the initial and final points, but also on the path in parameter space. The inequivalence of S_{S} and S_{th} implies that derivatives of S_{S} are not predictive of coexistence. In other words, a nonequilibrium steady state is not determined by maximizing the Shannon entropy. Our results cast doubt on the possibility of defining a state function that plays the role of a thermodynamic entropy for nonequilibrium steady states.

Factors affecting exchange rate policies in Asian countries

Purpose - The unique features of each exchange rate system, the advantage and disadvantage of them play a decisive role on the financial stability of the country's economy. Therefore, the choice of the right exchange rate system is important for the economic performance of the countries. This study aims to examine the factors affecting the choice of exchange rate of Asian countries. Methodology - The factors affecting exchange rate selection of Asian economies will be studied within a theoretical framework. In the light of IMF reports, exchange rate policies of Asian countries will be given and relevant literature will be evaluated. Findings- Both national and international factors are effective in the exchange rate selection. While economic policies, institutions and regimes are among national factors, international factors include US policy, international institutions and financial crises. Conclusion- In the choice of the exchange rate, Asian economies prefer to take appropriate positions according to the changing conditions of time. The increase in global economic and political relations affects exchange rate systems, and therefore encourages the implementation of competitive exchange rates.

Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor reallocation upon commodity price volatility. When labor and product markets are not welldeveloped, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a counterpoint to conventional arguments in favor of flexible exchange rates and a rationale as to why exchange rate targeting is appropriate in agricultural economies.

Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor reallocation upon commodity price volatility. When labor and product markets are not welldeveloped, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a counterpoint to conventional arguments in favor of flexible exchange rates and a rationale as to why exchange rate targeting is appropriate in agricultural economies.

Exchange Rate Choices of Microstates

In this paper I first explain why most microstates (countries with less than two million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences, combined with a more integrated world economy, probably explains why there are now more benefits to independence. I explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. I then, using the Geweke-Hajivassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications.

Exchange Rate Choices of Microstates

In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications.

Exchange Rate Regimes in Developing and Emerging Economies and the Incidence of IMF Programs

The global economic crisis will compel many countries to revise key economic policies, including their exchange rate regime. The International Monetary Fund will have significant influence on their choices, and has exhibited a bias against intermediate regimes. We examine the link between exchange rate regimes and IMF program use and find no evidence that countries with intermediate exchange rate regimes require more frequent IMF assistance. Rather they appear somewhat less dependent, especially when compared to fixed exchange rates. Our results suggest that intermediate regimes should remain a viable and possibly desirable exchange rate choice for some countries.

A Macroeconomic Perspective on Reserve Accumulation

AbstractThis paper nests the buffer stock model within a standard open‐economy model to capture two motives for international reserves accumulation—the insurance motive and the export‐led growth motive. The model is solved for two exchange‐rate policies, discretion and a rule with escape clause. It illustrates the behavior of international reserves and other macroeconomic variables when the policymaker pursues output and inflation stabilization and recognizes the supply of reserves can constrain the choice of exchange rate and the choice of exchange rate affects the supply of reserves. When output is below potential, it is optimal under both discretion and the rule to adopt a weak currency and promote export‐led growth to achieve output and inflation stabilization. This policy leads to reserve accumulation and is consistent with the behavior of China. When reserves are low initially, welfare is higher when the policymaker follows a rule.

Pegs, Baskets, and the Importance of Policy Credibility: Lessons of the 1992-93 ERM Crisis

This paper argues that, in contrast to the popular bipolar view on exchange rate choices, intermediate regimes in general and regional exchange rate systems such as the European Monetary System (EMS) in particular should not be ruled out per se even in today's world of highly mobile capital. The paper highlights that the 1992/93 crisis of the EMS' Exchange Rate Mechanism was a crisis of an exchange rate system and not just the collapse of unilateral pegs pursued by individual countries. Based on an assessment of credibility of the EMS before and during the crisis, the paper discusses distinct features that add to the credibility of regional exchange rate systems. It reasons that a system that is built around well-defined rules, and which is managed very carefully and co-operatively according to those rules, could be both credible and sustainable even in the 21st century.

Exchange Rates and Cohesion: Historical Perspectives and Political‐Economy Considerations

AbstractWe consider the political economy of exchange rate choice and its implications for economic growth from an historical perspective. Previous studies have tended to find only a weak association between the choice of exchange rate regime on the one hand and growth and cohesion on the other. Our findings confirm this negative result, but then go on to explain it by showing that the implications of the exchange rate regime for growth and cohesion are context‐specific. They show that the choice of entry rate is important and that when the global monetary regime operates as an engine of deflation it is inadvisable for countries to link up to it. We draw out the implications of these findings for the debate over Britain and the euro.

Market Exchange Rates Or Purchasing Power Parity: Does The Choice Make A Difference To The Climate Debate?

Critics of the Intergovernmental Panel on Climate Change’s Special Report on Emission Scenarios claim that the use of market exchange rates (MER) rather than purchasing power parity (PPP) to measure gross domestic product (GDP) has led to a significant upward bias in projections of greenhouse gas emissions, and hence unrealistically high future temperature. Rather than revisit the debate on the choice of exchange rates, we address a much simpler question: when it comes to temperature change, how much does it matter if potential GDP is expressed in MER rather than PPP? Employing a computable general equilibrium model designed to examine a variety of issues in the climate debate, we find that there is a difference, but that it is only minor.

Market Exchange Rates or Purchasing Power Parity: Does the Choice Make a Difference to the Climate Debate?

Critics of the Intergovernmental Panel on Climate Change's Special Report on Emission Scenarios claim that the use of market exchange rates rather than purchasing power parity has led to a significant upward bias in projections of greenhouse gas emissions, and hence unrealistically high future temperature. Rather than revisit the debate on the choice of exchange rates, we address a much simpler question: does the choice make a difference when it comes to projecting future temperature change? Employing a computable general equilibrium model designed to examine a variety of issues in the climate debate, we find that the answer is yes, but the difference is only minor.

Excess Volatility of Exchange Rates with Unobservable Fundamentals

The authors present tests of excess volatility of exchange rates which impose minimal structure on the data and do not commit to a choice of exchange rate “fundamentals.” The method builds on existing volatility tests of asset prices, combining them with a procedure that extracts unobservable fundamentals from survey‐based exchange rate expectations. The method is applied to data for the three major exchange rates since 1984, and broad evidence is given of excess volatility with respect to the predictions of the canonical asset‐pricing model of the exchange rate with rational expectations.

Excess Volatility and the Asset-Pricing Exchange Rate Model With Unobservable Fundamentals

This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate “fundamentals.” Our method builds on existing tests of excess volatility in asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess exchange rate volatility with respect to the predictions of the canonical asset-pricing model in an efficient market.

Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals

This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate “fundamentals.” Our method builds on existing tests of excess volatility in asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess exchange rate volatility with respect to the predictions of the canonical asset-pricing model in an efficient market.

Impact of trade on purchasing power parity in black market and official exchange rates

In this study, the impact of trade on purchasing power parity was tested for a sample of Asian currencies using official and black market exchange rates. Cross exchange rates were used in order to directly compare prices between countries. The efficient markets version of PPP cannot be rejected for most trading country pairs using official exchange rates. For nontrading country pairs, PPP cannot be rejected using black market exchange rates. An implication of these results for future research is that the choice of exchange rates in PPP studies should be determined by trade or lack thereof between any two countries.

A Re-Assessment of the Relationship between Real Exchange Rates and Real Interest Rates: 1974-1990

The general view of the economics profession is that we can not explain exchange rate movements. However, some researchers still contend that the relationship between real interest rates and the real exchange rate is a useful framework for thinking about exchange rate movements. This paper asks whether there is such a systematic relationship and whether it is revealed by the data. In our attempt to find such a relationship we investigate whether the empirical results are conditional on: (1) the time period selected, (2) the choice of interest rate, (3) the measure of expected inflation, and (4) the choice of exchange rate. The results show that exchange rates and interest rates, both nominal and real are nonstationary; however, they are not cointegrated with each other. On the other hand, the dynamic models indicate that there might be a long-run relationship between these variables, but cannot corroborate this. Consequently, the final conclusion is that the empirical results do not confirm the relationship and this result is robust across exchange rates, time periods, interest rates, and inflation measures.

World Military Expenditures

Military expenditure is difficult to define. Major issues are functional versus institutional approaches to defense, indirect and intangible costs and benefits and current versus comprehensive accounting. Authoritative institutions have adopted standard definitions but national governments are free to use their own definitions. Specific inflation pressures complicate the creation of real time series of military expenditures. International comparisons are influenced by the choice of exchange rates. For some countries, no credible data are available. Data series on military expenditures and arms transfers must be used with caution as the publishing institutions have only limited resources to deal with the numerous conceptual and practical problems.