DP7987 | Exchange Rate Regimes in the Modern Era: Fixed, Floating, and Flaky

Author(s)

Publication Date

01/09/2010

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

This paper provides a selective survey of the incidence, causes, and consequences of a country?s choice of its exchange rate regime. I begin with a critical review of Klein and Shambaugh?s (2010) book Exchange Rate Regimes in the Modern Era, and then proceed to provide an alternative overview of what the economics professions knows and needs to know about exchange rate regimes. While a fixed exchange rate with capital mobility is a well-defined monetary regime, floating is not; thus, it is unclear whether it is theoretically sensible to compare countries across exchange rate regimes. This comparison is quite difficult to make empirically. It is often hard to figure out what the exchange rate regime of a country is in practice, since there are multiple conflicting regime classifications. More importantly, similar countries choose radically different exchange rate regimes without substantive consequences for macroeconomic outcomes like output growth and inflation. That is, the profession knows surprisingly little about either the causes or consequences of national choices of exchange rate regimes. But since the consequences of these choices are small, understanding their causes is of only academic interest.