European Parliament Library

Exchange Rate Choices of Microstates, Patrick Imam

In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications
Table Of Contents
Contents; I. Introduction; II. What Is a Microstate?; III. Why Do Microstates Choose Independence?; A. The Cost of Being a Microstate; Higher Costs; Higher Risks; B. The Benefits of Being a Microstate; Better Accommodation of Preferences; C. Choice of Independence; IV. Choosing Exchange Rate Policy in Microstates; A. Problems of Floating Exchange Rate in Microstates; B. Advantages of Hard Pegs in Microstates; V. Why Do Microstates Choose a Given Form of Hard Peg?; A. Dollarization; B. Currency Board Arrangements; C. Fixed Exchange Rates; D. How Do the Different Hard Pegs Compare?
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (48 p.)
Specific Material Designation
Form Of Item

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