Measuring exchange rate flexibility in Europe

Gaetano, D'Adamo (2009): Measuring exchange rate flexibility in Europe.

Abstract

In official terms, European countries that are not in the EMU have been showing a polarization of monetary policy regimes in the last fifteen years: either Inflation Targeting or fixed exchange rates. I apply several methods recently developed by the literature to measure exchange rate flexibility to these European countries, in order to see whether such polarization has indeed occurred from a de facto point of view. Using these approaches, I find that the move to Inflation Targeting did bring about higher exchange rate flexibility, but only up to a level that is not comparable to that of the non-European benchmark floaters. Inflation Targeters in Europe also seem to have put some weight on stabilization of the exchange rate vis à vis the euro, after its introduction; fixed exchange rate arrangements, instead, apart from official policy changes, remained mostly stable throughout the last decade.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange Rate Regimes, Fear of Floating, Inflation Targeting
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Ball, C. P. and Reyes, J. (2008) “Inflation Targeting or Fear of Floating in Disguise? A Broader Perspective” Journal of Macroeconomics 30 (2008), 308-326.

Calvo, G.A. and Reinhart, C.M. (2002) “Fear of Floating”, The Quarterly Journal of Economics vol. 118, Issue 2, p. 379-407. Additional material on http://terpconnect.umd.edu/~creinhar .

Clarida, R.H. (2001) “The empirics of monetary policy rules in open economies”, International Journal of Finance & Economics, 6: 315-323.

Edwards, S. (2006) “The relationship between Exchange Rates and Inflation Targeting Revisited”, NBER Working Paper No. 12163.

Fischer, S. (2004) “Exchange Rate Regimes: is the bipolar view correct?” in Fischer, S. (ed.) IMF Essays from a time of crisis: the International Financial System, Stabilization, and Development. MIT Press, Cambridge, MA.

Frankel, J. (1993) “Is Japan creating a Yen Bloc in East Asia and the Pacific?” in Frankel, Kahler (eds.) Regionalism and Rivalry: Japan and the U.S. In Pacific Asia, University of Chicago Press, Chicago.

Frankel, J. and Wei, S.J. (2008) “Estimation of de facto exchange rate regimes: synthesis of the techniques for inferring flexibility and basket weights”, IMF Staff Papers Vol. 55, N.3.

Frankel, J. , E. Fajnzylber, S. Schmuckler and L. Servén, (2001) “Verifying Exchange Rate Regimes”, Journal of Development Economics, Vol. 66, No. 2 pp. 351-386.

Gali, J. and Monacelli, T. (2005) “Monetary Policy and Exchange Rate volatility in a Small Open Economy”, Review of Economic Studies 72 : 707-734.

Golinelli, R. and Rovelli, R. (2005) “Monetary Policy transmission, interest rate rules and inflation targeting in three transition countries”, Journal of Banking and Finance 29, 183-201

Levy-Yeyati, E. and Sturzenegger, F. (2003) “To Float or to Fix: Evidence on the impact of Exchange Rate Regimes on growth”, American Economic Review 93 (4) : 1173-1193.

Levy-Yeyati, E. and Sturzenegger, F. (2005) “Classifying Exchange Rate Regimes: Deeds vs. Words”, European Economic Review 49: 1603-1635.

Levy-Yeyati, E. and Sturzenegger, F. (2007) “Fear of Appreciation”, World Bank Policy Research Working Paper 4387.

Reinhart, C.M. and Rogoff, K.S. (2004) “The Modern History of Exchange Rate Arrangements: A Reinterpretation”, The Quarterly Journal of Economics vol. 119, issue 1, pages 1-48.

Reynard, S. (2008) “What drives the Swiss Franc?”, Swiss National Bank Working Paper 2008-14.

Svensson, L.E.O. (1999) “Inflation Targeting as a Monetary Policy Rule”, Journal of Monetary Economics 43: 607 – 654.

Svensson, L.E.O. (2000) “Open Economy Inflation Targeting”, Journal of International Economics 50 (1): 155-183.

Svensson, L.E.O. (2003) “What is wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules”, Journal of Economic Literature 41 (2) 426-477.

Taylor, J. (2001) “The role of the exchange rate in Monetary-Policy Rules”, American Economic Review, 91 (2): 263-267.

Van Dijk, D., Munandar, H., and Hafner, C. M. (2005) “The Euro introduction and Non-Euro Currencies”, Tinbergen Institute Discussion Paper.

Von Ungern-Sternberg, T. (1987) “Does the Swiss National Bank stabilize the Swiss Franc Exchange Rates?“, Journal of Business and Economic Statistics 5 (1) , 105-113.