European Parliament Library

Limits of Floating Exchange Rates :, the Role of Foreign Currency Debt and Import Structure, Pascal Towbin, Sebastian Weber

A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Theory; A. IS-LM-BP with Foreign Debt and Incomplete Pass-through; B. Adjustment to an External Demand Shock; 1. The Peg; 2. The Float; 1. Summary of Theoretical Predictions; 3. Simulation of Responses under Peg and Float; 1. Output response to a negative external demand shock: Difference between float and peg; III. Data; IV. Model and Estimation; A. Empirical Model and Identification; B. Interaction Terms; 2. Kernel density of import structure and debt under float and peg; C. Estimation and Inference; V. Results
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (78 p.)
Specific Material Designation
Form Of Item

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