Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments

July 10, 2017

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Format: Chicago

Tara Iyer. Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor reallocation upon commodity price volatility. When labor and product markets are not welldeveloped, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a counterpoint to conventional arguments in favor of flexible exchange rates and a rationale as to why exchange rate targeting is appropriate in agricultural economies.

Subject: Commodities, Commodity markets, Consumption, Economic sectors, Exchange rate flexibility, Financial crises, Financial markets, Foreign exchange, Labor, Labor markets, National accounts

Keywords: Africa, Commodity exporter, Commodity markets, Commodity sector, Consumption, Exchange rate flexibility, Global, Labor market interaction, Labor markets, Price fluctuation, Product market development

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/154
Stock No:

WPIEA2017154
ISBN:

9781484305980
ISSN:

1018-5941

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