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The experience of floating exchange rates has led many economists to
advocate their replacement by a system of pegged-but-adjustable rates.
In Discussion Paper No. 240, Visiting Research Fellow Peter Kenen
compares how pegged and floating exchange rates affect each country's
ability to achieve its domestic policy objectives independently, without
having to coordinate its monetary policy with that of other countries.
He uses a two-country portfolio-balance model with perfect capital
mobility, which is subjected to a variety of shocks. Kenen finds that a
floating exchange rate cannot confer policy autonomy on the governments
of interdependent economies: a pegged-but-adjustable exchange rate
minimizes the need for policy coordination in all the cases considered.
These results are reported more fully in this Bulletin in the report of
a lunchtime meeting given by Peter Kenen. |