Kicking the habit: moving from pegged rates to greater exchange rate flexibility

Article Abstract:

Policymakers find it difficult to move from pegged foreign exchange rates to greater exchange rate flexibility despite the existence of strong incentives for such flexibility. This phenomenon is evident in a study of developing countries over a period of 20 years. The experience of these countries shows that it is possible to engineer a smooth transition from pegged exchange rates to greater exchange rate flexibility. One option is to create an alternative nominal anchor once the pegged rate ceases to become the reference point for monetary policy. It is also necessary to maintain confidence once the exchange rate has been removed as the anchor for monetary policy.

Public Finance Activities, Fiscal Policy, Laws, regulations and rules, Foreign exchange market

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ERM realignment risk and its economic determinants as reflected in cross-rate options

Article Abstract:

Data on over-the-counter options between the mark and the pound, lira, French franc, and peseta are employed to evaluate the effectiveness of exchange rate target zones within the Exchange Rate Mechanism. Results indicated that implied volatility reaches a maximum near the edges of an exchange rate band rather than at the middle of the band, benefitting target zone models with endogenous realignment risk. This model of implied volatility is similar even if the data is truncated six months before devaluation, realignment, or regime shift.

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Can foreign aid accelerate stabilisation?

Article Abstract:

The effects of foreign aid on economic stabilization are determined using an extended Alesina and Drazen stabilization model. The model considers inflation persistence as a result of distributional conflict wherein each player attempts to shift distributional costs to their competitors. This conflict results in delays of foreign aid decision and implementation which hampers economic stabilization. Foreign aid will accelerate stabilization if implemented early in the inflation period.

Foreign Aid NEC, Research, Models, Economic aspects, Inflation (Finance), Economic assistance, Foreign economic assistance, Distribution (Economics), Economic stabilization, Foreign assistance, Inflation (Economics)

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