This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same The Optimal Degree of Exchange Rate Flexibility: a Target Zone Approach This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both choice of the degree of fixity –or the degree of flexi bility- of the exchange rate. Usually, the peg involves a degree of flexibility of 2% against a certain level. However, if the exchange rate fluctuates by more than the agreed level, the Central bank needs to intervene to maintain the target exchange rate peg. An adjustable peg system usually allows countries to revalue their peg – if it is necessary to regain competitiveness.
2000 and also fail to detect a strong link between exchange rate flexibility and interest rate autonomy for the 1990s. Although they do find some connection between interest rate insularity and exchange rate flexibility for the 1970s and 1980s, these results are not conclusive as they include countries with very different degrees of market
The degree of exchange rate flexibility is a function of the band width. Bands are either symmetric around a crawling central parity or widen gradually with an asymmetric choice of the crawl of upper and lower bands (in the latter case, there may be no preannounced central rate). Within this pure definition of flexible exchange rate, we can find two types of flexible exchange rates: pure floating regimes and managed floating regimes. On the one hand, pure floating regimes exist when, in a flexible exchange rate regime, there are absolutely no official purchases or sales of currency. 3. Degree of exchange rate flexibility In the previous section the nominal exchange rate was assumed to be either perfectly flexible (D = 1) or perfectly fixed (D = 0). In reality, such extremes seldom exist, raising the question of how best to measure the degree of exchange rate flexibility. Transaction exposure arises from the effect that exchange rate fluctuations have on a company’s obligations to make or receive payments denominated in foreign currency. This type of exposure is
Among major emerging market economies, several have managed exchange rates, with varying degrees of management. This Report highlights the need for greater exchange rate flexibility in these economies and most notably in China. It also emphasizes the need for greater transparency
Under a floating exchange rate system, a trade deficit means a capital inflow or the exchange rate fixed, which causes an expansion of the output level in the In contrast to the fixed exchange rate world, monetary policy can change the level of income with floating exchange rates. Since the exchange rate adjusts to yield In presence of total price flexibility, the monetary contraction reduces the domestic price level. The effect on exchange rate depends on the exchange rate regime
