Macroeconomic imbalances and exchange rate regime shifts

No 2007:4, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper uses a dynamic stochastic rational expectations model of a small open economy to shed some light on factors determining exits from a fixed to a flexible exchange rate regime. Exits are in the model determined by a concern for macroeconomic stabilization. If cost-push shocks are important relative to demand shocks exits should occur more likely in times of low consumption and output, high interest rates, negative asset holdings, current account deficits, high inflation and high domestic prices. If the policy maker is more sensitive to negative rather than positive output deviations the probability of exits increases overall and is tilted toward exits with accompanying depreciation.

Keywords: exchange rates; exchange rate regimes; rational expectations model (search for similar items in EconPapers)
JEL-codes: E42 E44 E47 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2007-01-16
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2007_004

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