Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis

Joseph Gagnon

No PB13-28, Policy Briefs from Peterson Institute for International Economics

Abstract: Inflation targeting countries with flexible exchange rates performed better during the global financial crisis and its aftermath than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it. But, abandoning a hard fix during a crisis is itself evidence of the economic costs of fixed rates. It is particularly telling that no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are averse to volatile exchange rates—they have a "fear of floating." Gagnon's results strongly suggest that flexible exchange rates enable countries to weather crises better than fixed rates and that the benefits of flexible rates are not limited to large countries. Policymakers should replace their fear of floating with a fear of fixing.

Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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