Working Paper: NBER ID: w2565
Authors: Alan C. Stockman
Abstract: This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for balance-of-payments purposes under pegged exchange rates. In particular. these restrictions become more likely during periods of time when countries suffer losses of international reserves than might. without policy changes. lead to a balance-of-payments crisis. This covariation of restrictions with reserve changes implies that real exchange rates will vary less under pegged than under floating exchange rates.
Keywords: Exchange Rates; Real Exchange Rate Variability; Pegged Exchange Rates; Floating Exchange Rates
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate systems (F33) | real exchange rate variability (F31) |
| reserve losses (G22) | trade restrictions (F14) |
| trade restrictions (F14) | real exchange rate variability (F31) |
| disturbance raising relative price of foreign goods (F31) | depreciation of domestic currency (F31) |
| depreciation of domestic currency (F31) | real exchange rate variability (F31) |