Dynamic Effects of Changes in the Exchange Rate System

Abstract

We propose a new dynamic transition analysis on the basis of a small open economy dynamic stochastic general equilibrium model. Our proposed analysis differs from existing static and conventional dynamic analyses in that shifts from a fixed exchange rate regime to a basket peg or a floating regime are explicitly explored. We apply quantitative analysis, using data from the People's Republic of China and Thailand, and find that both economies would be better off shifting from a dollar peg to a basket peg or a floating regime over the long run. Furthermore, the longer the transition period, the greater the benefits of shifting to a basket peg regime from a dollar peg regime owing to limited volatility in interest rates. Regarding sudden shifts to a desired regime, the welfare gains are larger under a shift to a basket peg if the exchange rate fluctuates significantly.

A Roadmap to a Successful Exchange Rate Regime Transition: Takeaways from 6 African Transitions

“…These results were corroborated by a recent study by Yu (2022), who analyzed transitions in 93 countries between 1970 and 2010. Yoshino et al (2016) adopted another methodology to find the optimal exchange rate regime transition policy in China and Thailand. The findings showed that the US Dollar peg is only desirable in the short run, indicating that the economies would benefit more from transitioning to a flexible or floating regime.…”