Working Paper: CEPR ID: DP929
Authors: Andrew K. Rose
Abstract: This paper uses a panel of data from 22 countries between 1967 and 1992 to explore the trade-off between the `Holy Trinity' of fixed exchange rates, independent monetary policy, and capital mobility. I use: flexible- and sticky-price monetary exchange rate models to parameterize monetary divergence; factor analysis to extract measures of capital mobility from a variety of different indicators; and conditional exchange rate volatility to measure the degree to which the exchange rate is fixed. Exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility. Interestingly, exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band, even after taking monetary divergence and capital mobility into account.
Keywords: fixed; floating; band regime; panel
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary divergence (E49) | exchange rate volatility (F31) |
| capital mobility (F20) | exchange rate volatility (F31) |
| width of exchange rate band (F31) | conditional exchange rate volatility (F31) |