Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2007:4: Macroeconomic imbalances and exchange rate regime shifts
Erik Post ()
Additional contact information
Erik Post: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: This paper uses a dynamic stochastic rational expectations model of a small open economy to shed some light on factors determining exits from a fixed to a flexible exchange rate regime. Exits are in the model determined by a concern for macroeconomic stabilization. If cost-push shocks are important relative to demand shocks exits should occur more likely in times of low consumption and output, high interest rates, negative asset holdings, current account deficits, high inflation and high domestic prices. If the policy maker is more sensitive to negative rather than positive output deviations the probability of exits increases overall and is tilted toward exits with accompanying depreciation.
Keywords: exchange rates; exchange rate regimes; rational expectations model
38 pages, January 16, 2007
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