No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect
IMF Working Papers, September 28, 2018
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- No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect
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Bibliographic details
- Authors: Yan Carriere-Swallow, Nicolas E Magud, Juan Yepez
- Published: September 28, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484378236.001
Theoretical framing
- 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.
- Focus: transmission of terms-of-trade shocks to domestic real variables.
Empirical findings
- The magnitude of the expenditure switching effect is positively associated to the degree of exchange rate flexibility.
- Flexible exchange rates allow for significant adjustment in relative prices.
- Adjustment in relative prices lowers the burden of adjustment on demand for domestic goods.
- In some cases, flexible exchange rates facilitate a faster and more durable external adjustment process.
Robustness and nonlinearities
- Results are robust to accounting for possible non-linearities due to balance sheet effects or currency mismatches.
Key statistics and publication facts
- Pages: 30
- Volume: 2018
- Issue: 213
- Series: Working Paper No. 2018/213
- DOI: https://doi.org/10.5089/9781484378236.001
Policy implications and interpretation
- Greater exchange rate flexibility can enhance shock absorption by enabling relative price adjustment.
- When expenditure switching is stronger under flexible regimes, the demand-side burden of external shocks on domestic goods can be reduced, potentially accelerating external adjustment.
By Yan Carriere-Swallow, Nicolas E Magud, and Juan Yepez; IMF Working Paper No. 2018/213 (September 28, 2018).
Content in this bundle
- wp18213 - Section III–VI