Role Of Exchange Rate Regime Research Articles

Exchange rate regimes and national price levels

This paper explores the role of exchange rate regimes in explaining deviations from the classic theory of purchasing power parity. Examining a broad panel of countries, I find that developing countries with fixed exchange rate regimes have national price levels that are 20 percent higher than those with flexible regimes. For industrial countries, the relation between regimes and price levels is qualitatively similar but weaker. I investigate several explanations for this pattern, and find that exchange-rate overshooting in floats, inflation inertia in pegs and expansionary policies can explain only 5 percentage points of the observed differences. I also show that even though the observed pattern could be the outcome of a class of open economy models pioneered by Obstfeld and Rogoff, the data provides limited empirical support for the predictions of this model.

Exchange rate regimes and trade prices Does the EMS matter?

The paper investigates the role of exchange rate regimes on the process of trade adjustment. A two-period model of a duopoly with consumer switching costs is constructed. The perception of economic agents regarding exchange rate stability is explicitly introduced. The model is tested using bilateral trade prices data for flows inside and outside the European Monetary System (EMS). Results suggest that a system of pegged rates, like the EMS, although helpful, is not necessary to achieve a smooth process of trade adjustment. Rather than the type of exchange rate regime, it appears that misalignment is the crucial factor.