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THE GLOBAL IMPLICATIONS OF REGIONAL EXCHANGE RATE REGIMES

Harris Dellas

University of Bern, Department of Economics, CEPR and IMOP

George Tavlas

Bank of Greece, Economic Research Department

ABSTRACT

We examine the implications of a regional, fixed exchange rate regime for global exchange rate volatility. The concept of the optimum currency area turns out to play an important role. The formation of a regional regime tends to decrease global volatility when countries are symmetric. The effects tend to be ambiguous in the case of asymmetries. The reduction in global volatility is larger when the rest of the world has more rigid labor markets than the peggers. When the exchange rate management is done mostly by countries with relatively more flexible labor markets. And in the presence of a negative correlation in productivity shocks across countries.

Keywords: Regional exchange rate systems, global exchange rate volatility, optimum currency area

JEL classification: E4, E5, F4

Acknowledgements
We would like to thank participants in the 8th International Conference on Macroeconomic Analysis and International Finance, 2004 Rethymno, Crete and in particular Athanasios Papadopoulos for valuable suggestions. Dellas would also like to thank the Hong Kong Institute of Monetary Research for its hospitality. The views expressed are the authors’ own and should not be interpreted as those of their respective institutions.

Address for correspondence:

George Tavlas,
Economic Research Department,
Bank of Greece, 21 El. Venizelou St.,
10250 Athens, Greece,
Tel. +30210-320.2370, Fax +30210 320.2432
Email: gtavlas@bankofgreece.gr


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