Exchange Rates and Asymmetric Policy Regimes: When Does Exchange Rate Targeting Pay?

Andrew Hughes Hallett

Oxford Economic Papers, 1993, vol. 45, issue 2, 191-206

Abstract: Whether exchange rate targeting helps economic performance depends on whether shocks and spillovers are mutually reinforcing or offsetting; hence, on whether the cost of supporting the extra exchange rate target is greater than the degree of coordination it induces. Asymmetries in policy power, spillover effects, external shocks, or the degree of commitment to the exchange rate target, may reinforce these, making it more likely that targeting is damaging. Hence asymmetries are an important contributory factor, but not a fundamental cause of failure. Traditional analysis of identically symmetric economies may suggest that exchange rate targeting is generally welfare-improving, whereas in practice that property needs to be checked out on a case-by-case basis. Copyright 1993 by Royal Economic Society.

Date: 1993
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