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To Peg Or Not To Peg?

Author

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  • ANTHONY J. MAKIN

    (Griffith Business School, Griffith University, Gold Coast, PMB50, Qld 9726, Australia)

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.

Suggested Citation

  • Anthony J. Makin, 2007. "To Peg Or Not To Peg?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 52(01), pages 39-52.
    • Handle: RePEc:wsi:serxxx:v:52:y:2007:i:01:n:s0217590807002555
    DOI: 10.1142/S0217590807002555
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    References listed on IDEAS

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    1. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, October.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    3. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, number 9780521485845, October.
    4. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan, vol. 49(1), pages 1-5.
    5. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, October.
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