The Relative Efficiency of Rules for Monitoring the Real Exchange Rate: Some Further Proposals
Two of the main stylised facts associated with the exchange rate regime since 1973 are persistent misalignments of the real exchange rate and persistent deviations of output from its trend. These phenomena, which have come as a surprise to those who were proponents of a floating exchange rate regime, have prompted a re-examination of the relative merits of exchange regimes. In particular, Miller and Williamson (1988) have compared the asymptotic properties of a regime with pure floating with the asymptotic properties of a regime with fixed nominal and fixed real exchange rates. Their own preference is for a regime with fixed real exchange rates.
The main purpose of this paper is to put forth a money supply rule that retains the advantages that accrue to a regime of fixed real exchange rates without the disadvantages associated with such a regime. The paper also improves on the Miller-Williamson presentation of two-country, symmetric modelling in a variety of ways designed to cast such modelling in a broader and more general framework of analysis.
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