Friedman Redux: External Adjustment and Exchange Rate Flexibility

By Atish R. Ghosh, Mahvash S Qureshi, Charalambos G Tsangarides

August 8, 2014

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Atish R. Ghosh, Mahvash S Qureshi, and Charalambos G Tsangarides. Friedman Redux: External Adjustment and Exchange Rate Flexibility, (USA: International Monetary Fund, 2014) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do. We argue that this is because they use composite (or aggregate) exchange rate regime classifications, which often mask very heterogeneous bilateral relationships between countries. Constructing a novel dataset of bilateral exchange rate regimes that differentiates by the degree of exchange rate flexibility, as well as by direct and indirect exchange rate relationships, for 181 countries over 1980–2011, we find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment. Our results are supported by several “natural experiments” of exogenous changes in bilateral exchange rate regimes.

Subject: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, International trade, Trade balance

Keywords: Bilateral trade balance, Classification dataset, Conventional peg, Eurozone country, Exchange rate, Exchange rate arrangements, Exchange rate flexibility, Exchange rate regime, Exchange rate regimes, Exchange rates, External dynamics, Global, Global imbalances, Regime classification, Regime classification dataset, Regime relationship, Regime switch, Switch year, Trade balance, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/146
Stock No:

WPIEA2014146
ISBN:

9781498359245
ISSN:

1018-5941

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