Fixing Exchange Rates: A Virtual Quest for Fundamentals
37 Pages Posted: 3 May 2004 Last revised: 26 Oct 2022
Date Written: October 1993
Fixed exchange rates are less volatile than floating rates. But the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes. This suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful. It also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability.
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