Abstract
This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada's (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank's policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains 'Fear of floating' and 'Fear of pegging'.
| Original language | English |
|---|---|
| Pages (from-to) | 315-343 |
| Number of pages | 29 |
| Journal | International Economics and Economic Policy |
| Volume | 6 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2009 |
| Externally published | Yes |
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Keywords
- De jure and de facto
- Intervention
- Managed floating
ASJC Scopus subject areas
- Economics and Econometrics
Cite this
The optimal exchange rate regime for a small country. / Akiba, Hiroya; Iida, Yukihiro; Kitamura, Yoshihiro.
In: International Economics and Economic Policy, Vol. 6, No. 3, 2009, p. 315-343.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The optimal exchange rate regime for a small country
AU - Akiba, Hiroya
AU - Iida, Yukihiro
AU - Kitamura, Yoshihiro
PY - 2009
Y1 - 2009
N2 - This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada's (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank's policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains 'Fear of floating' and 'Fear of pegging'.
AB - This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada's (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank's policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains 'Fear of floating' and 'Fear of pegging'.
KW - De jure and de facto
KW - Intervention
KW - Managed floating
UR - http://www.scopus.com/inward/record.url?scp=70349611118&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=70349611118&partnerID=8YFLogxK
U2 - 10.1007/s10368-009-0140-5
DO - 10.1007/s10368-009-0140-5
M3 - Article
AN - SCOPUS:70349611118
VL - 6
SP - 315
EP - 343
JO - International Economics and Economic Policy
JF - International Economics and Economic Policy
SN - 0020-5230
IS - 3
ER -