Flexible Exchange Rates as Shock Absorbers

Edwards, Sebastián; Levy-Yeyati, Eduardo Levy

doi:10.3386/w9867

Cited by 149 publications

(148 citation statements)

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“…It also underscores the benefits of "flexible exchange rates as shock absorbers" (Edwards and Levy-Yeyati 2005). In providing support to the flexible exchange-rate corner, the findings reported here complement recent work on the benefits of inflation targeting (IT) worldwide-unthinkable without a float-over competing nominal anchors (Mishkin and Schmidt-Hebbel 2005).…”

Section: Implications For Latin Americasupporting

confidence: 77%

Comments on S. Edwards: “Monetary unions, external shocks and economic performance: a Latin American perspective”

Schmidt-Hebbel¹

2006

IEEP

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I discuss Sebastian Edwards' most recent paper with great pleasure. As so much of the work of this distinguished economist, this paper provides new insights on a burning issue in international economics. Here Edwards provides empirical evidence on the resilience to external shocks of countries that lack a national currency ("monetary-union" or MU countries). The paper starts by reviewing the issues and literature relevant on exchange-rate regimes, dollarization, and MU in Latin America, with an emphasis on the question if countries in the region satisfy key optimal currency area criteria. Then the paper provides extensive new evidence on economic performance in MU countries, in comparison to countries with a national currency, using a large world panel sample. Performance tests are conducted for the comparative likelihood of MU countries of sudden stops in capital flows (SS) and large current (deficit) reversals (CAR), as well as their ability to absorb terms-oftrade shocks, SS, and CAR. The results are generally negative and significant for the comparative performance of MU countries. To set the stage, I start my comments by documenting first how country selection of exchange-rate and monetary regimes is quickly evolving in the world during the last decades, discussing subsequently how economists' views follow suit (Section 1). Then I discuss some aspects of Edwards' paper, focusing in particular on the data and model specification (Section 2). I end with brief implications for exchange-rate and monetary regime choice in Latin America.

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Section: Implications For Latin Americasupporting

confidence: 77%

Comments on S. Edwards: “Monetary unions, external shocks and economic performance: a Latin American perspective”

Schmidt-Hebbel¹

2006

IEEP

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“…In their study, Edwards and Yeyati (2016) show that under flexible exchange rates, economies grow more rapidly than under fixed rates. In addition, they show that countries with rigid exchange rates experience more exacerbated effects from terms of trade.…”

Section: Introduction mentioning

confidence: 99%

Testing for explosive bubbles in the South African-US exchange rate using the sequential ADF procedures

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Anoruo

2017

Banks and Bank Systems

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This paper tests for the existence of speculative bubbles in the South African-US exchange rate using the sequential ADF procedures. In particular, the paper uses the SADF and GSADF right-tailed unit root tests to explore the existence of explosive bubbles in the South African-US exchange rate for the time period running from January1980 through July 2012. The results provide evidence in support of the existence of explosive bubbles in the nominal rand-dollar exchange rate, the real exchange rate of traded and non-traded goods. The explosive behavior exhibited by the South African rand-US dollar exchange rate can be interpreted as evidence of rational bubbles given that this behavior is driven by the fundamentals including relative prices of traded and non-traded goods.Keywords: exchange rates, rational bubbles, sequential unit root test, traded goods, non-traded goods. JEL Classification: F31, C12, C15, C22. Received on: 23 th of January, 2017. Accepted on: 15 th of February, 2017. Introduction The subject of rational bubbles continues to attract the attention of investors and policy makers alike. Early detection of speculative bubbles is important to investors, as it enables them to rebalance their portfolios in anticipation of the impending crash. For policy makers, a clear understanding of the existence and size of rational bubbles is crucial in order for them to formulate and implement appropriate strategies to mitigate speculative bubbles in the foreign exchange markets. According to Kindelberger and Aliber (2005) bubble is a sharp increase in asset prices whereby the initial increase generates expectations of further increases and, hence, attracting new buyers.Economic theory has always postulated that exchange rates play crucial roles in determining international trade and, hence, economic growth. In their study, Edwards and Yeyati (2016) show that under flexible exchange rates, economies grow more rapidly than under fixed rates. In addition, they show that countries with rigid exchange rates experience more exacerbated effects from terms of trade. However, some studies have pointed out that since the introduction of flexible exchange rates, many national economies and markets have experienced increased volatility. Finance theory posits that there is a nexus between exchange rates, inflation and interest rate differentials, which contribute to the direction of capital and asset flows between countries, and, thus, determine asset prices. Therefore, This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International license, which permits re-use, distribution, and reproduction, provided the materials aren't used for commercial purposes and the original work is properly cited.

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“…Ojo (1998), Jhingan (2002), Edwards and Yeyati (2003) suggestions states that exchange rate regime that is driven will make better economic growth since it affects the most of the economic variables studied.…”

Section: Resultsmentioning

confidence: 99%

Effects of Exchange Rate Fluctuations on the Balance of Payment in the Nigerian Economy

Nwaolisa

2017

int.jour.sci.res.mana

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This study seeks to find out how exchange rates fluctuation impacts on balance of payments (BOP).The secondary data where used specifically from CBN and National Statistics publications from 1990-2013. Average values for import, exports, exchange rate and balance of payment were collected for various years. Data were analyzed using multiple regression unit root test, making use of Augmented Dickey Fuller Test, E-view test statistics making use of variables, critical values and decision in carrying out unit root test. Where the findings showed that foreign exchange rate fluctuation in general affects some of these macro-economic variables. The Researcher concludes that government should harmonize monetary and fiscal policies to boost non-oil exports. A market driven exchange rate will encourage exports and take care of disequilibria in balance of payments.

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Flexible Exchange Rates as Shock Absorbers

Cited by 149 publications

References 12 publications

Comments on S. Edwards: “Monetary unions, external shocks and economic performance: a Latin American perspective”

Comments on S. Edwards: “Monetary unions, external shocks and economic performance: a Latin American perspective”

Testing for explosive bubbles in the South African-US exchange rate using the sequential ADF procedures

Effects of Exchange Rate Fluctuations on the Balance of Payment in the Nigerian Economy

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