Persistence of Output Fluctuations Under Alternative Exchange Rate Regimes

Abstract

This working paper was written by Mark Crosby (University of Melbourne) and Glenn Otto (University of New South Wales).

In a recent paper Giugale and Korobow (2000) present evidence to suggest the time that output takes to return to its trend following a negative shock is faster under a flexible exchange rate regime than under a fixed exchange rate. In this paper VAR models are used to provide empirical evidence on the speed of recovery of real output following an interest rate shock for a number of Asian economies. We find little evidence that the degree of persistence in output is systematically related to the type of exchange rate regime that particular countries have adopted. Across a number of specifications we find that real output for Hong Kong and Australia has the least persistence following a negative interest rate shock. These countries represent the two ends of the spectrum, the former has an exchange rate that is pegged to the U.S. dollar via a currency board and the latter has one of the more flexible exchange rates in the Asian region.