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Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis

Author

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  • Joseph E. Gagnon

    (Peterson Institute for International Economics)

Abstract
Inflation targeting countries with flexible exchange rates performed better during the global financial crisis and its aftermath than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it. But, abandoning a hard fix during a crisis is itself evidence of the economic costs of fixed rates. It is particularly telling that no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are averse to volatile exchange rates—they have a "fear of floating." Gagnon's results strongly suggest that flexible exchange rates enable countries to weather crises better than fixed rates and that the benefits of flexible rates are not limited to large countries. Policymakers should replace their fear of floating with a fear of fixing.

Suggested Citation

  • Joseph E. Gagnon, 2013. "Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis," Policy Briefs PB13-28, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb13-28
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    References listed on IDEAS

    as
    1. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
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    3. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    4. Joseph E. Gagnon & Marc Hinterschweiger, 2011. "Flexible Exchange Rates for a Stable World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6277, April.
    5. Klein, Michael W. & Shambaugh, Jay C., 2012. "Exchange Rate Regimes in the Modern Era," MIT Press Books, The MIT Press, edition 1, volume 1, number 026251799x, April.
    6. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, April.
    7. Anders Aslund, 2010. "The Last Shall Be the First: The East European Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 5218, April.
    8. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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    Cited by:

    1. Petrevski, Goran, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," EconStor Preprints 271122, ZBW - Leibniz Information Centre for Economics.
    2. Ouyang, Alice Y. & Rajan, Ramkishen S. & Li, Jie, 2016. "Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?," Japan and the World Economy, Elsevier, vol. 39(C), pages 62-72.
    3. Amalia Morales-Zumaquero & Sim�n Sosvilla-Rivero, 2015. "Growth dynamics, financial crises and exchange rate regimes," Applied Economics Letters, Taylor & Francis Journals, vol. 22(10), pages 767-771, July.
    4. Alice Y. Ouyang & Ramkishen S. Rajan, 2016. "Does Inflation Targeting in Asia Reduce Exchange Rate Volatility?," International Economic Journal, Taylor & Francis Journals, vol. 30(2), pages 294-311, June.
    5. Nassirou, Aïchat, 2017. "Chocs macroéconomiques et intégration d’une union économique et monétaire: cas du Nigéria [Macroeconomic shocks and integration of an economic and monetary union: case of Nigeria]," MPRA Paper 79167, University Library of Munich, Germany.

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