Dynamic Effects of Changes in the Exchange Rate System
Asian Development Review 33:1, 2016
51 Pages Posted: 9 Apr 2016
Date Written: April 4, 2016
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.
Keywords: basket peg, dynamic transition analysis, East Asia, exchange rate regime, transition path
JEL Classification: F33, F41, F42
Suggested Citation: Suggested Citation