Exchange rate regimes
The exchange rate regime is the characterization ofthe way a government manages its national currencyin the foreign exchange market. The different formsof exchange rate regimes relate to how actively thegovernment manages the foreign exchange rate, andhow its actions are supported by institutional arrangements.At one end of the spectrum is an independentlyfloating currency; at the other, a fixedexchange rate system, sometimes referred to as a‘‘hard peg.’’Many varieties of exchange rate regimesexist between these two poles.
See also band, basket, and crawl (BBC); Bretton Woods system; capital controls; capital mobility; common currency; currency board arrangement (CBA); currency crisis; currency substitution and dollarization; discipline; equilibrium exchange rate; European Central Bank; European Monetary Union; exchange rate forecasting; exchange rate volatility; Federal Reserve Board; financial crisis; foreign exchange intervention; hot money and sudden stops; impossible trinity; inflation targeting; International Monetary Fund (IMF); international reserves; monetary conditions index; purchasing power parity; real exchange rate; sterilization
- Eichengreen, Barry, and Charles Wyplosz. 1993. ‘‘The UnstableEMS.’’ Brookings Papers on Economic Activity 1. Washington, DC: Brookings Institution. Investigates the 1992 EMS crisis, offering four explanations and emphasizing the constraints of the ‘‘impossible trinity’’ on capital flows, fixed exchange rates, and monetary policy.
- Fatum, Rasmus, and Michael Hutchison. 2002. ‘‘ECB Foreign Exchange Intervention and the Euro: Institu tional Framework, News, and Intervention.’’ Open Economies Review 13 (4) (October): 412 25. Explains the foreign exchange market policy of the newly estab lished European Central Bank and the effect of reported intervention on the euro exchange rate.
- . 2006. ‘‘Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan.’’ Journal of InternationalMoney and Finance 25: 199 219. Measures the effectiveness of large scale intervention operations by the Bank of Japan using an event study approach with daily data.
- Fischer, Stanley. 2001. ‘‘Exchange Rate Regimes: Is the Bipolar View Correct?’’ Journal of Economic Perspectives 15 (2) (spring): 3 24. Presents a broad survey of the history and theory of exchange rate regime failures and explores whether hard currency pegs or flexible rates are the only practical alternatives for exchange rate regime choice.
- International Monetary Fund. 2006. ‘‘De Facto Classifica tion of Exchange Rate Regimes and Monetary Policy Framework, as of December 31, 2005.’’ Down loadable from http://www.imf.org/external/np/mfd/er/ index.asp. Presents data on the classification of exchange rate regimes and monetary policy frameworks for IMF member countries.
- Krugman, Paul. 1979. ‘‘A Model of Balance of Payments Crises.’’ Journal ofMoney, Credit, and Banking (August): 311 25. A classic, which shows how fundamental macroeconomic imbalances lead to predicable runs on central bank reserves.
- Marston, Richard C. 1985. ‘‘Stabilization Policies.’’ In Handbook of International Economics, vol. 2, edited by R. W. Jones, P. B. Kenen, G. M. Grossman, and K. Rogoff. Amsterdam: Elsevier, 859 916. A survey of macroeconomic policies in open economies with a sec tion on the optimal exchange rate regime choice as a function of underlying disturbances, structure of the economy, and policy objective function.
- Obstfeld, Maurice. 1996. ‘‘Models of Currency Crisis with Self Fulfilling Features.’’ European Economic Review 40 (April): 1037 47. A classic contribution demonstrat ing that currency crises may be associated with self fulfilling speculative attacks and showing the existence of multiple equilibrium exchange rates when the policy authorities and private sector behave strategically.
MICHAEL M. HUTCHISON