Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments

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 a...

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Bibliographic Details
Main Author: Iyer, Tara
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2017
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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653 |a Wealth 
653 |a Economics 
653 |a Finance 
653 |a Financial crises 
653 |a Labor markets 
653 |a National accounts 
653 |a Labor 
653 |a Economics of specific sectors 
653 |a Investments: Commodities 
653 |a Informal Economy 
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653 |a Currency crises 
653 |a Financial markets 
653 |a Macroeconomics 
653 |a Commercial products 
653 |a Income economics 
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653 |a Commodity Markets 
653 |a Economic & financial crises & disasters 
653 |a Labour 
653 |a Saving 
653 |a Economics: General 
653 |a Commodity exchanges 
653 |a Currency 
653 |a Informal sector 
653 |a General Financial Markets: General (includes Measurement and Data) 
653 |a Demand and Supply of Labor: General 
653 |a Economic sectors 
653 |a Exchange rate flexibility 
653 |a Consumption 
653 |a Labor market 
653 |a Macroeconomics: Consumption 
653 |a Underground Econom 
653 |a Investment & securities 
653 |a Commodity markets 
653 |a Finance: General 
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520 |a 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