JOURNAL ARTICLE
Cite JOURNAL ARTICLE
Style
Format
Real Exchange Rate Fluctuations in a Small Open Economy Under Fixed and Flexible Exchange Rates
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 107 (1987), Iss. 1 : pp. 51–66
Additional Information
Article Details
Klein, Martin
References
-
Argy, V./ Porter, M. (1972), The Forward Exchange Market and the Effects of Domestic and External Disturbances Under Alternative Exchange Rate Systems. IMF Staff Papers 19, 503 - 32.
Google Scholar -
Boyer, R. (1978), Optimal Foreign Exchange Intervention. Journal of Political Economy 86, 1045 - 56.
Google Scholar -
Dornbusch, R. (1976), Expectations and Exchange Rate Dynamics. Journal of Political Economy 84, 1161 - 76.
Google Scholar -
Eaton, J. / Turnovsky, S. J. (1984), The Forward Exchange Market, Speculation, and Exchange Market Intervention. The Quarterly Journal of Economic 1, 45 - 69.
Google Scholar -
Fischer, St. (1977), Stability and Exchange Rate Systems in a Monetarist Model of the Balance of Payments, in: Aliber, R. (ed.), The Political Economy of Monetary Reform. London, 59 - 73. (1983), Seigniorage and Fixed Exchange Rates: An Optimal Inflation Analysis, in: P. A. Armella, R. Dornbusch and M. Obstfeld (eds.), Financial Policies and the World Capital Market: The Problem of Latin American Countries. Chicago, 59 - 70.
Google Scholar -
Flood, R. P. (1979), Capital Mobility and the Choice of Exchange Rate System. International Economic Review 20, 405 - 416.
Google Scholar -
Frenkel, JA./ Aizenman, J. (1983), Aspects of the Optimal Management of Exchange Rates, in: E. Claassen, und P. Salin (eds.), Recent Issues in the Theory of Flexible Exchange Rates. Amsterdam, 201 - 25.
Google Scholar -
Genberg, Hans (1981), Effects of Central Bank Intervention in the Foreign Exchange Market. IMF Staff Papers 28, 451 - 76.
Google Scholar -
Henderson, Dale W. (1982), The Role of Intervention Policy in Open Economy Financial Policy: A Macroeconomic Perspective, International Finance Discussing Papers. Washington D.C. (Board of Governors of the Federal Reserve System).
Google Scholar -
Turnovsky, S. J. (1983), Exchange Market Intervention Policies in a Small Open Economy, in: J. Bhandari and B. H. Putnam (eds.), Economic Interdependence and Flexible Exchange Rates. Cambridge, Mass., 286 - 311.
Google Scholar
Abstract
The two central questions of this paper are as follows. First, does macroeconomic theory offer an explanation for the observed high level of real exchange rate fluctuations in the flexible exchange rate period? Second, are these fluctuations destabilizing with respect to domestic output, or are they rather the symptom of the proper functioning of the real exchange rate as an automatic stabilizer? We establish the following results. First, the transition from fixed to flexible exchange rates does not per se imply greater volatility of real exchange rates. Rather, this depends on the flexibility of domestic output prices. Second, with flexible output prices the relative degree of real exchange rate fluctuations in both regimes depends crucially on the origin of the exogenous disturbances. Third, even if - with sticky prices - the flexible rate regime leads to higher real exchange rate fluctuations this does not necessarily imply higher output fluctuations. Rather, depending on the origin of the exogenous disturbances real exchange rate fluctuations may be stabilizing.