The potential consequences of alternative exchange rate regimes: A study of three candidate regions

Abstract

This paper examines the macroeconomic consequences of selecting alternative exchange rate regimes of countries in three regions. In particular, it studies whether Austria, the Netherlands, Canada and New Zealand made the right monetary regime choices between 1970 and 2000. We focus on the role of asymmetric shocks as a core determinant for the evaluation of various monetary regimes by studying the impact of a hard peg, a full monetary union, or floating exchange rates (with or without inflation targeting) on selected macroeconomic variables. Estimates of structural VARs are used to ascertain if the countries under review meet the essential ingredients of an Optimum Currency Area (OCA) and thus are candidates for a monetary union. Counterfactual experiments help to study economic outcomes had these countries pursued alternative monetary strategies. We conclude that a floating regime with inflation targeting is best for Canada, a monetary union with Australia is the best course of action for New Zealand, and monetary union is the appropriate choice for the Netherlands while there are reasons to believe that Austria might have been better off with a floating regime, at least for a time. We also find that good monetary policy is not confined to any particular exchange rate regime and that political and institutional factors weigh heavily in this decision. Copyright © 2003 John Wiley & Sons, Ltd.

Testing for Balance Sheet Effects in Emerging Markets: A Non‐Crisis Setting*

“…Impulse responses, consistent with the DSGE model, show that responses to foreign interest rate shocks that are orthogonalized, and thus not correlated with EMBS (balance sheet strength), are smaller than responses to foreign interest rate shocks that are not orthogonalized. Furthermore, the results show that the exclusion or inclusion of EMBS can produce apparently conflicting results: under flexible exchange rate regimes, output response is smaller in the model with EMBS, in keeping with the findings of the literature; however, under relatively fixed regimes when EMBS are excluded, output response is smaller (see Hochreiter et al 2003;Levy-Yeyati and Sturzenegger 2003;Bergvall 2005;Hoffmann 2007). These results, together with the fact that fixed exchange rate regimes are vulnerable to speculative attacks, suggest that exchange rate intervention (a managed float) without a formal commitment to a peg may do a better job of insulating economies from external shocks than a clean float.…”

Managed floating as a strategy to achieve selected monetary policy objectives

“…For example, the model here, a version which was used in Hochreiter, Korinek, and Siklos (2003), is richer than most in that it admits a role for fiscal policy. However, in other respects, it is more in the spirit of the Mundell-Fleming type of macro model than the new open economy macro models (NOEM) that have recently gained popularity.…”

“…18 The parameters are estimated via GMM, using a 16 Also, see Hochreiter et al (2003) who explore the sensitivity of counterfactual experiments in this context to assumptions about the stationarity of some of the series considered here. 17 An attraction of using instrument rules is that they are less sensitive to the assumed structure of the economy as would be true of optimal rules (e.g., Levin & Williams, 2003).…”

“…We chose comparable interest rates across the countries considered but other interest rate combinations could also have been appropriate. A data appendix in Hochreiter et al (2003) provides data sources and definitions. 11 An alternative would have been to specify and estimate a joint model for each of the candidate-target groups of countries.…”

Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries?

“…On the other hand, the Maastricht model of monetary dominance and convergence includes several thresholds on key macroeconomic fundamentals for the sake of the establishment of a currency area. For instance, for a country to be considered a potential candidate for a monetary union, it is required to have a fiscal budget deficit not greater than 3% of GDP (Hochreiter, Korinek, & Siklos, 2003). Thus, like the first approach, this methodology mainly depends on descriptive measures instead of an econometric background.…”