Fear of Floating Needn't Imply Fixed Rates: Feasible Options for Intermediate Exchange Rate Regimes
Thomas D. Willett
Additional contact information
Thomas D. Willett: Claremont McKenna College and Claremont Graduate University
Claremont Colleges Working Papers from Claremont Colleges
The criteria of the theory of optimum currency areas suggest that many (most?) countries are not good candidates for either of the poles of genuinely fixed exchange rates or freely floating exchange rates. Thus many countries should have an interest in intermediate exchange rate regimes. However, in a world of substantial capital mobility most forms of intermediate exchange rate regimes have proven to be highly crisis prone. The paper argues that the unholy trinity analysis doesn't imply that intermediate exchange rate regimes are inherently unstable, but rather that exchange rate and monetary policies need to be jointly determined. The difficulties of maintaining such consistency are as much political as economic since temporarily pegged or managed rates create a time inconsistency problem. Therefore policy officials need some institutional insulation from short sighted political pressures. A problem with most intermediate regimes is that they have focused on particular forms of limited exchange rate flexibility per se, rather than the weight that should be given to the exchange rate in setting monetary policy. It is argued that OCA theory provides the framework for determining the appropriate weights and limits on the amount of sterilized intervention to maintain the consistency between exchange rate and monetary policies necessary to avoid currency crises. The paper also considers a number of the issues involved in integrating their approach with the literature on open economy aspects of inflation targeting.
Keywords: political economy; capital mobility; exchange rates; discipline (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-ifn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.claremontmckenna.edu/rdschool/papers/2002-18.pdf [301 Moved Permanently]--> https://www.claremontmckenna.edu/rdschool/papers/2002-18.pdf [301 Moved Permanently]--> http://www.cmc.edu/rdschool/papers/2002-18.pdf [301 Moved Permanently]--> https://www.cmc.edu/rdschool/papers/2002-18.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:clm:clmeco:2002-18
Access Statistics for this paper
More papers in Claremont Colleges Working Papers from Claremont Colleges Contact information at EDIRC.
Bibliographic data for series maintained by ().