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Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory

Alan C. Stockman

NBER Working Paper No. 2565 (Also Reprint No. r1418)
Issued in April 1988
NBER Program(s):The International Trade and Investment Program, The International Finance and Macroeconomics Program

This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for balance-of-payments purposes under pegged exchange rates. In particular. these restrictions become more likely during periods of time when countries suffer losses of international reserves than might. without policy changes. lead to a balance-of-payments crisis. This covariation of restrictions with reserve changes implies that real exchange rates will vary less under pegged than under floating exchange rates.

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Document Object Identifier (DOI): 10.3386/w2565

Published: Carnegie-Rochester Conference Series on Public Policy, Vol. 29, pp. 259-294 , (Autumn 1988). citation courtesy of

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