TO PEG OR NOT TO PEG?

Anthony Makin

The Singapore Economic Review (SER), 2007, vol. 52, issue 01, 39-52

Abstract: This paper presents a simple framework for analyzing the macroeconomic effects of internal and external shocks under polar exchange rate regimes. It highlights the significance of fluctuations in competitiveness and real income for exchange rate policy, revealing that positive (negative) real shocks increase (decrease) national income and strengthen (weaken) the balance of payments and exchange rate. It also shows that,ceteris paribus, pegged exchange rates facilitate real income growth for emerging economies while lowering its variability when exports and productivity are improving and monetary shocks predominate. Alternatively, a floating exchange rate system may be most appropriate for less open advanced economies with relatively stable monetary sectors that frequently experience negative real shocks.

Keywords: Competitiveness; national income; exchange rate choice (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:serxxx:v:52:y:2007:i:01:n:s0217590807002555

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DOI: 10.1142/S0217590807002555

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