Cataclysms and Currencies: Does the Exchange Rate Regime Matter for Real Shocks?
- Topics:
- Inflation,
- Quantitative Analysis
- Tags:
- Adjustment,
- Exchange Rate,
- Finance,
- Free Trade,
- Shock
- Source:
- International Monetary Fund
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Overview: Does the choice of exchange rate regime affect the way an economy's adjustment to real shocks? Exploiting the randomness of natural shocks, this paper assesses empirically the often contrasting answers found in the theoretical literature. The evidence supports key themes in this literature, and points to an important tradeoff between regimes. While the claim of faster adjustment to real shocks under flexible rate arrangements have merit, so does the idea that exchange rate variability can impede investment. And the benefits from faster adjustment may come at the cost of foregoing the long run productivity benefits embodied in the larger investment response in fixed rate regimes.
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Format: PDF | Size: 509KB | Date: Apr 2005 | Pages: 36
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