Greater Exchange Rate Stability Research Articles

The sophistication of East Asian exports

Hausmann et al. found that countries that export more sophisticated products tend to subsequently grow more rapidly. We examine the sophistication of Asia's exports using Hausmann et al.'s and Kwan's measures. Japan remains the technology leader in Asia, but not in the world. In 2012, Japan's exports competed with those of South Korea and Taiwan and were complementary with those of China and ASEAN. Korea and Taiwan competed intensely with each other and less so with China and ASEAN. ASEAN countries competed extensively with each other. Given the high levels of competition and cooperation among East Asian countries, greater exchange rate stability in the region would reduce export volatility among competitors and facilitate trade among comrades.

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.

The emerging global financial architecture: Tracing and evaluating new patterns of the trilemma configuration

This paper investigates how the trilemma policy mix affects economic performance in developing countries. We find that greater monetary independence can dampen output volatility, while greater exchange rate stability is associated with greater output volatility, which can be mitigated by reserve accumulation; greater monetary autonomy is associated with higher inflation, while greater exchange rate stability and greater financial openness is linked with lower inflation; pursuit of exchange rate stability can increase output volatility when financial development is at an intermediate stage. Greater financial openness, when accompanied by a high level of financial development, reduces output volatility.

Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma

Using the “trilemma indexes†developed by Aizenman et al. (2010) that measure the extent ofachievement in each of the three policy goals in the trilemma—monetary independence, exchange ratestability, and financial openness—we examine how policy configurations affect macroeconomicperformances, with focus on the Asian economies. We find that the three policy choices matter for outputvolatility and the medium-term level of inflation. Greater monetary independence is associated with loweroutput volatility while greater exchange rate stability implies greater output volatility, which can bemitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% ofGDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchangerate stability and greater financial openness could lower the inflation rate. We find that trilemma policyconfigurations affect output volatility through the investment or trade channel depending on the opennessof the economies. Our results indicate that policy makers in a more open economy would prefer pursuinggreater exchange rate stability while holding a massive amount of IR. Asian emerging market economiesare found to be equipped with macroeconomic policy configurations that help the economies to dampenthe volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears toenhance the stabilizing effect of the trilemma policy choices, and this may help explain the recentphenomenal buildup of IR in the region.

Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma — monetary independence, exchange rate stability, and financial openness — this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region.

Exchange Rate Regimes and Financial-Market Imperfections

This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an exchange rate regime is intertwined with the financial structure -- greater reliance on working capital to finance input needs, and greater segmentation of the domestic capital market increase the desirable exchange rate stability. This result follows from the observation that greater exchange rate stability is likely to reduce the real interest rate facing the producer, thereby increasing output. Hence, greater reliance on working capital increases the welfare gain attached to the lower interest rate associated with lower flexibility of the exchange rate, thereby increasing the desirability of a fixed exchange rate. Similarly, greater integration with the global capital market reduces the real interest rate benefits from exchange rate stability, increasing thereby the optimal flexibility of the exchange rate, and reducing the demand for international reserves.

Should the UK join the European single currency?

Reviews the attempts to introduce greater exchange rate stability into the European Union, culminating in the 1992 crisis in the Exchange Rate Mechanism, and the UK’s withdrawal. Outlines the Maastricht Treaty proposals for monetary union by 1999. Finally, reviews the arguments for and against UK adoption of the single currency, drawing, where possible, on the limited empirical evidence.

PRICE DISCIPLINE, OUTPUT COSTS AND EXCHANGE RATE STABILISATION: EMPIRICAL ESTIMATES FOR THE G3 COUNTRIES

Policy makers believe that exchange rate stabilization would induce greater price discipline for the participants. Economic analysis suggests some loss of output would also be incurred. This paper supplies some estimates of the net benefits by examining how the output-inflation trade-off varies as a function of the degree of exchange rate stabilization, for each of the G3 economies. It appears that exchange rate stabilization may give (Pareto) superior results for output and inflation, compared to a free float, but that outcome is the exception rather than the rule because the advantages of greater exchange rate stability are usually offset by greater monetary instability. Coordination as well as exchange rate stabilization is needed to secure price discipline without output losses. Copyright 1991 by Scottish Economic Society.

Exchange Rate Economics 1986: A Comment

Dornbusch opens by recording the recent huge fluctuations in real exchange rates, and notes that this phenomenon raises several major questions for analysis and research. These questions cover, first, the issue of why exchange rates move by so much for so long, second, whether such prolonged movements have subsequent sustained effects on the economy, and third, whether such phenomena indicate that governments should intervene more forcefully, and cooperatively, to seek to achieve greater exchange rate stability. I shall take his discussion of these issues largely in reverse order, starting with the policy issue. Given his American background, Dornbusch naturally concentrates on the recent history of the US dollar. He notes that 'Fiscal policy, including the expectations of correction associated with Gramm-Rudman, provides one interpretation of the dollar movements in the i 980s', and implies that he prefers this interpretation to the alternative suggestion of 'partial irrationality'. Indeed, in his model, as set out at the start of his paper, there is little room for doubt about the impact of fiscal expansion: thus he states, 'A fiscal expansion in this model brings about currency appreciation.' Yet, while I am prepared to accept that fiscal expansion in the specific context of the United States in the early I 98os did play a sizeable role in that particular exchange rate story, I am less convinced that that episode should be generalised. Here I am not thinking so much of the earlier Keynesian story about an adverse current account effect dominating a capital inflow, as of the credibility of the commitment of a government to meeting its increased debt by a future, deflationary increase in taxes. If a future British Government was to announce that it was going, say, to treble the size of the PSBR, would you expect the sterling exchange rate to go up, or down? If that same government was to announce at the same time that it would continue to adhere to maintaining strict control over domestic monetary growth, would you fully believe it? It may well be that the United States experience depended in some large part on the independence and credibility of Paul Volcker, indeed on a belief that in the end the confrontation of expansionary fiscal policy and counter-inflationary