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  • Has Australia's floating exchange rate regime been optimal?

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    79451_1.pdf (583.3Kb)
    Author(s)
    Makin, Anthony J
    Rohde, Nicholas
    Griffith University Author(s)
    Makin, Tony J.
    Rohde, Nicholas
    Year published
    2012
    Metadata
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    Abstract
    This paper develops a straightforward theoretical framework for evaluating exchange rate regime choice for small economies. It proposes that a floating exchange rate minimises national income and employment variation when real macroeconomic shocks predominate, whereas a pegged exchange rate achieves this goal should money demand shocks predominate. It then shows econometrically that, in the case of Australia, a floating exchange rate best suited the economy for the period 1985 to 2010, because real shocks were more significant than monetary shocks. Moreover, consistent with the theory, further results showing that a ...
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    This paper develops a straightforward theoretical framework for evaluating exchange rate regime choice for small economies. It proposes that a floating exchange rate minimises national income and employment variation when real macroeconomic shocks predominate, whereas a pegged exchange rate achieves this goal should money demand shocks predominate. It then shows econometrically that, in the case of Australia, a floating exchange rate best suited the economy for the period 1985 to 2010, because real shocks were more significant than monetary shocks. Moreover, consistent with the theory, further results showing that a stronger (weaker) exchange rate correlated with positive (negative) deviations from trend GDP affirm that a floating exchange rate regime was optimal for Australia over this time.
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    Journal Title
    Economic Modelling
    Volume
    29
    Issue
    4
    DOI
    https://doi.org/10.1016/j.econmod.2012.03.006
    Copyright Statement
    © 2012 Elsevier Inc. This is the author-manuscript version of this paper. Reproduced in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
    Subject
    Applied economics
    Macroeconomics (incl. monetary and fiscal theory)
    Econometrics
    Banking, finance and investment
    Publication URI
    http://hdl.handle.net/10072/48354
    Collection
    • Journal articles

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