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Managed Exchange Rates

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  • MARTIN F. J. PRACHOWNY

Abstract

Managed exchange rates have become a tool of macroeconomic stabilization policy. Much of the previous emphasis on parametrically chosen exchange rate regimes has missed the advantages of a strategy of a variable target exchange rate when the central bank tries to maintain equilibrium output in the face of various shocks to the economy. Based on a standard IS‐LM‐AS macromodel, optimal combinations of exchange rate and money supply changes are found that insulate the economy against all stipulated shocks. However, these combinations vary from one shock to another; therefore recognition signals are necessary. Continuous information on some variables allows the central bank to identify shocks if they can be guaranteed to occur individually, but not otherwise. As a second‐best strategy, ‘defensively managed exchange rates’ appear suitable. The paper also discusses some side effects and other practical difficulties of a managed exchange rate as an automatic stabilizer.

Suggested Citation

  • Martin F. J. Prachowny, 1986. "Managed Exchange Rates," The Economic Record, The Economic Society of Australia, vol. 62(4), pages 442-450, December.
    • Handle: RePEc:bla:ecorec:v:62:y:1986:i:4:p:442-450
    DOI: 10.1111/j.1475-4932.1986.tb00909.x
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    References listed on IDEAS

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    1. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-1055, December.
    2. Gordon R. Sparks, 1979. "The Choice of Monetary Policy Instruments in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 12(4), pages 615-624, November.
    3. Aizenman, Joshua & Frenkel, Jacob A, 1985. "Optimal Wage Indexation, Foreign Exchange Intervention, and Monetary Policy," American Economic Review, American Economic Association, vol. 75(3), pages 402-423, June.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Interventions in a Small Open Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 574-592, November.
    6. Don E. Roper & Stephen J. Turnovsky, 1980. "Optimal Exchange Market Intervention in a Simple Stochastic Macro Model," Canadian Journal of Economics, Canadian Economics Association, vol. 13(2), pages 296-309, May.
    7. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 197-216.
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    Cited by:

    1. Warwick J. McKibbin & Jeffrey Sachs, 1986. "Coordination of Monetary and Fiscal Policies in the OECD," NBER Working Papers 1800, National Bureau of Economic Research, Inc.
    2. Var Der Ploeg, F., 1989. "Monetary Interdependence Under Alternative Exchange-Rate Regime," Papers 8920, Tilburg - Center for Economic Research.
    3. Francesco Giavazzi & Alberto Giovannini, 1988. "Modèles du SME : l'Europe n'est-elle qu'une zone deutsche mark ?," Revue Économique, Programme National Persée, vol. 39(3), pages 641-666.
    4. Warwick J. McKibbin & Jeffrey D. Sachs, 1986. "Comparing the Performance of Alternative Exchange Arrangements," NBER Working Papers 2024, National Bureau of Economic Research, Inc.

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