1. Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis
- Author:
- Joseph E. Gagnon
- Publication Date:
- 11-2013
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- There is a long-standing debate among economists and policymakers on the benefits of flexible versus fixed exchange rates (Klein and Shambaugh 2010). In principle, flexible exchange rates allow a country's central bank to focus on stabilizing economic growth and inflation, which are the ultimate goals of monetary policy. However, some argue that in practice central banks often do not use their powers wisely and it may be better to restrict their freedom by requiring them to peg their currency to that of an important trading partner. Others note that flexible exchange rates are far more volatile than fundamental factors can explain (Flood and Rose 1995), raising the possibility that they may introduce wasteful cross-sectoral fluctuations in economic activity. One common viewpoint is that flexible exchange rates may be fine for large countries but that the smallest countries are better off with fixed exchange rates (Åslund 2010).
- Topic:
- Economics, Foreign Exchange, International Trade and Finance, Markets, and Financial Crisis
- Political Geography:
- United States, Japan, China, and United Kingdom