Determinants of Exchange Rate Practices

Determinants of Exchange Rate Practices - H ROBERT HELLER...

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H. ROBERT HELLER" Determinants of Exchange Rate Practices THE BREAKDOWN OF THE BRETTON WOODS par value system resulted in the de facto adoption of a wide variety of exchange rate systems. Each country's freedom to choose the exchange rate arrangements best suited to its needs was subsequently codified in Article IV ofthe Second Amend- ment to the Articles of Agreement of the International Monetary Fund. The choice of an appropriate exchange rate system is of great importance to a country as it will have important implications for the conduct of its domestic and international economic policy. The choice of an exchange rate regime might be a relatively simple exercise if countries were faced only with the classical textbook dichotomy of floating and fixed exchange rates. It is well known that some countries with ostensibly floating exchange rates intervene regularly in the foreign exchange market to stabilize the rate, whereas others with pegged exchange rates avail themselves of such wide intervention margins that the currency's value is determined within very wide limits by market forces. The choice is further complicated by the wide variety of pegging arrangements that have been adopted by different countries. Indeed, sometimes there exists a serious problem in defining unambiguously whether a country's currency is basically floating or pegged. For instance, the countries adhering to the European currency snake' are referred to both as * I am grateful to the many persons who made suggestions for improvements of this study, in particular the discussants at the conferences where earlier versions of this paper were presented and to anonymous referees. Mr. Kellett Hannah performed the statistical calculations. The opinions presented are those of the author and do not represent official views. ' As of July 1976 the group included Belgium-Luxembourg, Denmark, Germany, the Netherlands, Norway, and Sweden. At other times, snake membership has been different. H. ROBERT HELLER was chief. Financial Studies Division, International Monetary Fund, when this article was written. He is now vice-president for international economics. Bank of' 0022-2879/78/0878-0308$00.50/0 © 1978 Ohio State University Press JOURNAL OF MONEY, CREDIT, AND BANKING, vol. 10, no. 3 (August 1978)
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H. ROBERT HELLER ; 309 "group floaters," which gives the impression that they are basically floaters, and as countries observing "narrow exchange rate margins" implying that they are peggers. Of course, the snake countries are a bit of both: though they peg their currencies vis-a-vis the other member countries, they float as a group vis-a-vis other currencies. Similarly, the crawlers, whose currency values are adjusted frequently according to a set of indicators, resemble peggers in that the monetary authorities intervene regularly in the foreign exchange market and they are akin to floaters in that the value ofthe currency changes frequently. Differences between alternative pegging arrangements are therefore likely to
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Determinants of Exchange Rate Practices - H ROBERT HELLER...

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