Exchange Rate Regimes: Fixed, Flexible or Something in by I. Moosa

By I. Moosa

A superb consultant with all of the fundamentals to appreciate the several varieties of alternate fee regimes and the demanding situations they pose to diversified economies.

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Extra info for Exchange Rate Regimes: Fixed, Flexible or Something in Between

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11 shows the downward-sloping demand curve and the backward-bending supply curve. Because the supply curve is backwardbending, the equilibrium exchange rate may not be unique. 11, it is shown that there are three equilibrium values for the exchange rate: E1, E2 and E3. Multiple equilibria create several problems, the first of which is that some equilibrium exchange rate values are unstable. It is typically the case that each unstable equilibrium is bounded by two stable equilibria. When the exchange rate is above E2, it tends to move to E3, and when it is below E2 it tends to move to E1.

1 reports measures of volatility and correlation over three historical episodes (1885–1913, 1949–72 and 1973–present). 09 the gold standard period, the volatilities of the real and nominal exchange rates are very close, indicating indeed that the nominal exchange rate regime is non-neutral as suggested by Mussa (1986). However, the results also support the findings of Grilli and Kaminsky (1991), who argued that the closeness of the volatilities of the nominal and real exchange rates is a post-Second World War phenomenon.

In Chapter 5, a distinction will be made between the IMF’s (de jure) classification and the de facto classification of exchange rate regimes, which shows that a larger number of countries have intermediate regimes than is shown here. 10 seem to support the ‘hollowing out hypothesis’, which postulates that countries have been shying away from intermediate regimes, the de facto classification supports the hypothesis of ‘fear of floating’, which postulates that (developing) countries claiming to have floating rates have rather rigid rates.

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