No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect

By Yan Carriere-Swallow, Nicolas E Magud, Juan Yepez

September 28, 2018

Preview Citation

Format: Chicago

Yan Carriere-Swallow, Nicolas E Magud, and Juan Yepez. No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect, (USA: International Monetary Fund, 2018) accessed September 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Theoretical models on the relationship between prices and exchange rates predict that the magnitude of expenditure switching affects the optimal choice of exchange rate regime. Focusing on the transmission of terms-of-trade shocks to domestic real variables we document that the magnitude of the expenditure switching effect is positively associated to the degree of exchange rate flexibility. Moreover, results show that flexible exchange rates allow for significant adjustment in relative prices, which in turn lowers the burden of adjustment on demand for domestic goods and, in some cases, facilitates a faster and more durable external adjustment process. These results, which are robust to accounting for possible non-linearities due to balance sheet effects or currency mismatches, shed new light on the shock absorbing properties of flexible exchange rates.

Subject: Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Imports, International trade, National accounts, Real imports

Keywords: Arrangements in the case, Degree of exchange rate flexibility, Effect in economy, Exchange rate arrangements, Exchange rate classification index, Exchange rate flexibility, Exchange rate regime, Exchange rate regime classification, Exchange rates, Expenditure switching, Expenditure-switching effect, External adjustment, External shock, Imports, IRR exchange rate arrangement, Log terms of trade, Nominal exchange rate change, Real imports, Ten percent, Terms-of-trade, Terms-of-trade shock, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/213
Stock No:

WPIEA2018213
ISBN:

9781484378236
ISSN:

1018-5941

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