Essays on Exchange Rates and Macroeconomic Stability

Sammanfattning: This thesis consists of three self-contained essays.Essay 1 investigates the relevance of the exchange rate regime for macroeconomic stability. I simulate hypothetical macroeconomic developments under different hypothetical regimes in Sweden during the period 1974-1994. The main question is how stable output would have been if Sweden had had a floating exchange rate regime. Would it have been better with a floating exchange rate than the actual quasi-fixed regime? Also the development with an irrevocably fixed exchange rate is investigated. The results indicate that the central bank can stabilize much of the macroeconomic disturbances under a floating exchange rate, but still the volatility of the macroeconomic variables under the hypothetical floating exchange rate regime is about the same as under the actual quasi-fixed regime. Essay 2 analyzes the stabilizing properties of alternative monetary policy regimes. In practice there is a choice between two broad types of monetary policy regimes: a fixed exchange rate regime or a floating exchange rate regime. In this paper I compare exchange rate targeting with different floating exchange rate regimes: strict price level targeting, flexible price level targeting and output gap targeting. The paper also evaluates the actual choice of monetary policy regime for seven countries with a pure floating exchange rate regime. In most cases the actual regime can be described as flexible price level targeting. The results suggest that flexible and strict price level targeting gives lower real and nominal variability than both exchange rate targeting and output gap targeting. Essay 3 presents a model yielding testable implications concerning the long-run co-movements of real exchange rates, relative productivity, the trade balance and terms of trade. Countries with high productivity, trade deficits or improved terms of trade are found to have more appreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods. Exogenous terms of trade shocks are found to be the most important determinant of long run movements in the real exchange rate for Denmark and Norway, while demand shocks account for most of the long run variance in the real exchange rate for Finland and Sweden.